The world should just use Bitcoins

CFA Level III
#1

I wish there was just one global currency so we didn’t have to deal with this dark magic …

can someone explain to me covered interest rate parity and uncovered interest rate parity? In reference to Vol 4 p.104 of Schweser Notes.

are they both saying that there is no arbitrage opportunity with Carry Trade?

thanks,

#2

Covered interest rate parity means that there is a forward contract on the currencies that will ensure the parity condition (so that there is no arbitrage opportunity); it gives you the formula for what the forward exchange rate _ has to be _.

Uncovered interest rate parity means that there is no forward contract available on the currencies; it gives you a formula for what the expected exchange rate is (i.e., what the rate _ should be _) as if there were a forward contract available.

#3

thanks S2000…

just to play stupid… It is correct for me to say that if both those parity hold true then someone can not use Carry Trades to earn a profit? but in reality you could earn profit with carry trade before the market corrects itself right?

just want to make sure i understand this in my words.

#4

You’re welcome.

Correct . . .

. . . and correct.

Sounds as though you got it.