An examination of the theory of covered interest rate parity.
Written in 2002; 739 words; 2 sources; MLA; $ 26.95
Paper Summary:
This paper discusses the theory of covered interest rate parity which states that the prices from risk free assets with identical maturity should be equated across countries, after translation into a common currency. In other words, a risk free asset should cost the same dollar amount whether purchased in $US or some other currency. It tests the theory by analyzing empirical evidence to test whether the theory has held over the eighteen year period, 1980 to 1998. All the data used in empirical testing is presented in the appendix.
From the Paper:
"The theory behind uncovered interest rate parity is that
foreign exchange markets are so efficient that the expected future spot exchange rate for a particular currency will, on average, equal the present forward exchange rate. This result is theoretically due to the fact that information is quickly reflected in both the spot and forward exchange markets, that transaction costs are low or nonexistent, and that instruments denominated in different currencies are perfect substitutes for one another (University of Colorado, 2000, p.7)."
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