CFA Level 2 | Economics: Covered and Uncovered Interest Rate Parity 

Thanks for the coffee and the kind words, Beomkomap! 😎

You're welcome! If you are planning to buy/sell currency in one year's time and want to lock in the rate for exchange, then use the one-year forward rate

@@FabianMoa I see. May I know why isn’t the forward been used in solving the sample question?

This is what I'm thinking too.

Thanks, Ekta

These videos are created just for my RU-vid channel. Our (Noesis) online lecture videos are only available for enrolled students (those will cover the syllabus in detail). The online lecture videos will be available starting November. Face to face tutorials will only start in January/February, to allow time for viewing the lecture. If you want more information on classes, drop us an email at info@noesis.edu.sg

I didn't think that I would have posted so many videos on RU-vid. It only started with Derivatives but then I got more and more request. Thanks for the feedback, Parth. Would do that the next time.

@@FabianMoa love these! FRA would help

@@AndriFitness FRA is still in the works. Getting busier with classes nearer to the exam, so will post when I can find time.

Not really. For (F-S)/S, you could have used 0.032/1.12 = 2.85% Note: 320 points = 320/10000 = 0.032

That's correct for uncovered interest rate parity, but take note that inflation is not mentioned in this parity (that's for relative PPP)

@@FabianMoa Then is it also correct for covered interest rate parity?

Nope. Covered IRP is saying that the difference between Forward rate and Spot rate should be equals to the difference in the interest rates. If you believe that Covered IRP and Uncovered IRP holds, then we say that the forward rate is an unbiased estimate of the expected spot rate

@@FabianMoa I see. I read from the strategic management texbook about interest rate model, it says "If real rate of return to lenders is the same in all countries cos of free movement of capital and operation of law of one price, then any diff. in nominal rates will reflect diff. in inflation rates btw countries known as international fisher effect" So seems the firsher effect is combined into the interest rate parity theory. And then investopedia says diff. between covered IRP and uncovered IRP is that one uses forward rate and one uses expected spot rate. So I am still confused about them. so seems different inflation rates btw 2 countries can still explain the covered and uncovered interest rate parity

For UIRP, you don't need to use the forward points. For CIRP, the forwards points will close to the [spot rate * (interest rate of price currency - interest rate of base currency) * tenor]

@@FabianMoa Thanks Fabian!

"When you have lower deposit rate. Currency will depreciate not appreciate! It will weaken. Which mean that prices in that currency will go up as value deteriorate but he value will go down." - I agree with you on your statement. But in my video, I am referring to "What will happen to the exchange rate ASSUMING that uncovered interest rate parity holds, in other words, if no arbitrage is allowed to happen". In real life, we seldom see Uncovered IRP working in the short run.

@@FabianMoa Ok thank you for your explanation. It really helped me . I just wanted to correct you regarding terms that you used in this video....appreciation/depreciation of currency that confused me.