Answer: Covered interest rate parity holds, among other reasons, because the amount of currency that will be obtained from investing in either the domestic or the foreign currency is certain.

## Explanation **A is correct** - Covered interest rate parity holds because there is no uncertainty as to the amount of currency that will be obtained from investing in either the domestic or the foreign currency. This certainty comes from the use of forward contracts to lock in exchange rates. **B is incorrect** - Uncovered interest rate parity (UIRP) is not a no-arbitrage theorem. UIRP allows that exchange rates move for many different reasons and that investors should earn the same interest rate in all currencies after exchange rate movements are considered. This theorem has been seen to be violated many times in practice. **C is incorrect** - The ratio of interest rates in the formula has quote currency in the numerator and base currency in the denominator. The correct formula for forward rate calculation under covered interest rate parity is: \[ F = S \times \frac{(1 + r_{quote})}{(1 + r_{base})} \] where F is the forward rate, S is the spot rate, r_quote is the risk-free rate in the quote currency, and r_base is the risk-free rate in the base currency. **D is incorrect** - Forward points, expressed as a percentage of the spot rate, is approximately equal to the interest rate differential applied to time T under covered interest rate parity, not uncovered interest rate parity. Uncovered interest rate parity relates to expected future spot rates rather than forward rates.

Author: LeetQuiz .