The 'covered interest parity' asserts that because a forward contract and a cash-and-carry strategy accomplish the same conversion, they must result in the same exchange rate.

Question

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Covered interest parity states that no arbitrage opportunity should exist between the expected returns on a foreign currency investment and the returns on a domestic currency investment. When the interest rate differential between two currencies is not equal to the forward premium/discount, an arbitrage opportunity arises, resulting in a correction of the exchange rate. Thus, a forward contract and a cash-and-carry strategy would yield the same result under the covered interest parity condition.

The 'Covered Interest Parity' Asserts That Because a Forward Contract