If interest rate parity holds and the forward rate is expected to be an unbiased forecast of the future spot rate, then an uncovered investment in a foreign deposit will on average earn a similar effective yield as an investment in a domestic deposit.

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Interest rate parity states that on average, there should be no difference in the returns an investor earns from investing in either domestic or foreign deposits. The forward rate, which is based on the expected future spot rate, should also be an unbiased forecast, supporting the idea that foreign and domestic investments should return similar effective yields.

If Interest Rate Parity Holds and the Forward Rate Is