Uncovered interest parity

CFA Level II
#1

Uncovered interest parity

St = So (1+ Ra)/(1+Rb)T

Covered interest parity

F= So (1+Ra(n/360)) (1+Rb(n/360))

The question is why use T exponential for uncovered interest parity while adjust the rate with n/360 for covered interst parity?

Thanks

#2

It depends on whether the interest rates are effective rates (which they use in the Economics readings) or nominal rates (which they use in the Derivatives readings).

I wrote an article on nominal vs. effective interest rates which may be of some help: http://financialexamhelp123.com/nominal-vs-effective-interest-rates/

I also wrote an article on determining the value of a currency forward that reconciles the Econ formula with the Derivatives formula: http://financialexamhelp123.com/mark-to-market-value-of-a-currency-forward-contract/