Explanation:
Statement C is incorrect because Covered Interest Parity (CIP) requires interest rates for both currencies, not just one. The CIP formula is:
Where:
To verify CIP or engage in arbitrage, you need interest rates for both currencies A and B, not just currency A.
Why the other statements are correct:
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Q-77. Which of the following statements regarding covered interest parity (CIP) is not correct?
A
If CIP does not hold, market participants could make arbitrage profits.
B
The principle of CIP holds that interest rates implied in foreign exchange markets should be consistent with spot short-term interest rates.
C
For currencies A (domestic) and B (foreign), CIP requires only the spot and forward exchange rates for A and B and the money market interest rate on A.
D
CIP states that the forward and spot exchange differential on two currencies should mimic the difference of money market interest rates on these currencies.
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