Uncovered interest parity

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?


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/