Covered versus uncovered interest rate parity. I know that, “covered interest rate parity” is forced by arbitrage. My question: is the word “covered” to mean, “forced by” or “having to deal with” arbitrage? What variable or market force is missing with “uncovered interest rate parity?”
Ah ha, I am doing more reading on “covered”.
From Kaplan, “…uncovered interest rate parity is not bound by arbitrage.” That’s the appropriate phrase, “bound by arbitrage.”
“Covered” means “ensured”, for example, by a futures or forward contract.
“Uncovered” means “fingers crossed”.
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