“For the forward rate to be an unbiased predictor of the expected spot rate, both covered and uncovered interest parity must hold. For uncovered interest rate parity to hold, investors must be risk neutral”
Does risk neutral mean that everyone chooses to avoid any undue risk? “Risk Neutral” is used in many contexts in this curriculum so would like to know what people’s definitions for it is.
UIP suggests that the expected exchange rate is sustained by the spread between both countries’s yield, and as a result, gains cannot be made through “carry trading”, since the ER will move depending on this spread to rebalance. The investor becomes risk neutral at that point