Answer: both uncovered and covered interest rate parity hold

The forward exchange rate is an unbiased predictor of the future spot exchange rate when **both uncovered interest rate parity (UIRP) and covered interest rate parity (CIRP) hold**. **Explanation:** - **Covered Interest Rate Parity (CIRP)**: Forward rate = Spot rate × (1 + domestic interest rate) / (1 + foreign interest rate) - **Uncovered Interest Rate Parity (UIRP)**: Expected future spot rate = Spot rate × (1 + domestic interest rate) / (1 + foreign interest rate) When both conditions hold: - Forward rate = Expected future spot rate - This makes the forward rate an unbiased predictor In practice, forward rates often contain risk premiums and are not perfect predictors due to market inefficiencies and risk aversion.

Author: LeetQuiz Editorial Team