Economics Topic Test - Nexram

CFA Level II Economics
#1

I’m confused about the answer to one of the Econ topic test questions. The question asks to calculate the projected change in spot based on UNCOVERED interest rate parity. The answer explains that if uncovered interest rate parity holds the expected future spot rate is = to the forward rate. Since there is a forward rate involved wouldn’t that be covered interest rate parity rather than uncovered?

Part of the answer below

Answer

If uncovered interest rate parity holds, the expected spot rate one-year forward is equal to the one-year forward exchange rate. The forward exchange rate is calculated using the formula:

#2

The above CFAI explanation is correct. If uncovered interest rate parity holds, then we can say both the Ex-ante Relative PPP and the International Fisher condition also holds, and thus the expected spot rate will be an unbiased estimator of the future rate.

Just know for uncovered parity to holds only in the long run, and both the Ex-ante PPP and International Fisher Relations must hold as well.