Which of the following is the best deﬁnition of uncovered interest parity (UIP).

Question

Quizplus · Accepted Answer

Uncovered interest parity (UIP) is a theoretical relationship between the interest rates of two countries and the expected exchange rate between their currencies. It states that the expected percentage change in the exchange rate between two currencies is equal to the difference in their interest rates. If this relationship holds, investors would not be able to make a profit by borrowing in one currency, investing in another with a higher interest rate, and then converting back to the original currency at a higher exchange rate. However, in reality, UIP often does not hold due to various factors such as risk and uncertainty.

Which of the Following Is the Best Deﬁnition of Uncovered