If a currency is at a forward premium by as much as its interest rate is lower than the interest rate in the other country, covered interest parity holds.

Question

Quizplus · Accepted Answer

Covered interest parity states that the forward exchange rate should equal the spot exchange rate adjusted for the interest rate differential between two countries. If a currency is at a forward premium by as much as its interest rate is lower than the interest rate in the other country, this means that the forward rate is higher than it would be if only the interest rate differential was considered. This reflects the market's expectation of future currency appreciation. As a result, covered interest parity still holds in this case.

If a Currency Is at a Forward Premium by as Much