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Covered interest rate parity (CIP) implies which relation... | QuestionStock

Representative image for question: Covered interest rate parity (CIP) implies which relationship between spot, forward exchange rates and interest rates?

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Economics

Covered interest rate parity (CIP) implies which relationship between spot, forward exchange rates and interest rates?

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Covered interest rate parity (CIP) implies which relationship between spot, forward exchange rates and interest rates?

Options:

The forward exchange rate reflects interest rate differentials so arbitrage using forward contracts is eliminated
The expected future spot rate equals the current spot rate adjusted by interest differentials
Spot and forward rates move independently of interest rates under no-arbitrage
Forward rates equal historical average exchange rates regardless of interest differentials

Correct answer: The forward exchange rate reflects interest rate differentials so arbitrage using forward contracts is eliminated

Explanation: CIP states the forward premium/discount offsets interest differentials so covered arbitrage is eliminated; traders use forward contracts to enforce this relation, which famously deviated during the 2008 financial crisis.

Created 2026-03-10T18:50:05.924Z. Updated 2026-03-10T18:50:05.924Z.