Uncovered and covered interest rate parity

CFA Level II Derivatives
#1

Hi All

I am so confused about the uncovered and covered interest parity , 'cuase it seems to me the same for forward rate and expected future spot rate.

Thanks you so much

#2

I have not studied it for a while but I believe you are correct in that the formulas and concepts are the same but the big difference is that Covered Int Rate Parity is bound by arbitrage and must hold while uncovered is not. The reason is that all the inputs to Covered Int Rate Parity are traded in the market

#3

The uncovered parity is based on the expectations, while the covered one uses Forward contracts. This means that your interest rate difference is hedge with the contract.