Covered interest parity refers to the situation in which:
A) interest rates are the same in both currencies.
B) spot and forward rates are the same in both currencies.
C) the forward rate between the two currencies is equal to the ratio of their returns times the spot rate between the two currencies.
D) there is an opportunity for arbitrage whenever prices are sluggish and sticky.

Question

Quizplus · Accepted Answer

Covered interest parity implies that the relationship between the spot exchange rate, forward exchange rate, and interest rates in two countries must hold. This relationship is given by the formula: 
(1 + i₁)/(1 + i₂) = F/E 
Where i₁ is the interest rate in the first country, i₂ is the interest rate in the second country, F is the forward exchange rate, and E is the spot exchange rate. This implies that the forward exchange rate between two currencies is equal to the ratio of their returns times the spot exchange rate between the two currencies.

Covered Interest Parity Refers to the Situation in Which