The world should just use Bitcoins

[Candidate III]

I wish there was just one global currency so we didn’t have to deal with this dark magic …
can someone explain to me covered interest rate parity and uncovered interest rate parity? In reference to Vol 4 p.104 of Schweser Notes.
are they both saying that there is no arbitrage opportunity with Carry Trade?
thanks,

 

[S2000magician]

Covered interest rate parity means that there is a forward contract on the currencies that will ensure the parity condition (so that there is no arbitrage opportunity); it gives you the formula for what the forward exchange rate has to be.
Uncovered interest rate parity means that there is no forward contract available on the currencies; it gives you a formula for what the expected exchange rate is (i.e., what the rate should be) as if there were a forward contract available.

 

[Candidate III]

thanks S2000…
just to play stupid… It is correct for me to say that if both those parity hold true then someone can not use Carry Trades to earn a profit? but in reality you could earn profit with carry trade before the market corrects itself right?
just want to make sure i understand this in my words.

 

[S2000magician]

Candidate III wrote:thanks S2000…

You’re welcome.

Candidate III wrote:just to play stupid… It is correct for me to say that if both those parity hold true then someone can not use Carry Trades to earn a profit?

Correct …

Candidate III wrote:but in reality you could earn profit with carry trade before the market corrects itself right?

… and correct.

Candidate III wrote:just want to make sure i understand this in my words.

Sounds as though you got it.