Explanation

Among the three international parity conditions:

• Covered Interest Rate Parity (CIRP) is enforced by arbitrage
• Forward Rate Parity and Purchasing Power Parity (PPP) are not enforced by arbitrage

Why CIRP is enforced by arbitrage:

• CIRP states that the forward exchange rate should equal the spot exchange rate adjusted for the interest rate differential between two countries
• If this relationship doesn't hold, arbitrageurs can execute covered interest arbitrage:
  • Borrow in the low-interest currency
  • Convert to the high-interest currency at spot rate
  • Invest in the high-interest currency
  • Lock in the forward rate to eliminate exchange rate risk
  • Earn risk-free profits
• This arbitrage activity quickly eliminates any deviations from CIRP

Why PPP is not enforced by arbitrage:

• PPP suggests that exchange rates should adjust to equalize purchasing power across countries
• However, arbitrage is difficult due to:
  • Transaction costs
  • Non-tradable goods
  • Trade barriers
  • Different consumption baskets

Why Forward Rate Parity is not enforced by arbitrage:

• Forward rate parity is essentially the same as CIRP, so it is enforced by arbitrage
• However, among the options given, Covered Interest Rate Parity is the most direct answer

Therefore, Covered Interest Rate Parity (Option C) is the international parity condition that is enforced by arbitrage.