When covered interest rate parity holds, the forward exchange rate will be an unbiased forecast of the future spot exchange rate.
UNBIASED - this word is throwing me off! can someone else explain the meaning? or use another word.
Unbiased to me sounds like it uninfluenced. SO the fwd rate will be be affected by rate differentials? is this correct?
Covered interest rate parity always holds: it’s covered.
When uncovered interest rate parity holds, the forward exchange rate is an unbiased estimate of the future spot exchange rate.
Unbiased means that the expected value of the quantity we’re estimating is the value of our estimator:
E(future spot rate) = forward rate
Got it!
Thank you kindly!
Glad to hear.
You’re quite welcome.