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What is covered interest parity

Problem: The spot exchange rate between the U.S. dollar and the German mark is $.5500/DM. The dollar deposit rate is 8 percent and the DM deposit rate is 4 percent.

Q1. What is covered interest parity? What is the six-month forward rate if covered interest parity holds?

Q2. What is the unbiased forward rate hypothesis? If the unbiased forward rate hypothesis holds, what do you expect the spot rate between the U.S. dollar and the German mark to be in six months?

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Finance Basics: What is covered interest parity

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