W7 - UIP and Unbiasedness hypothesis

Question 1

What does the uncovered interest rate parity condition say?

Answer 1

That the expected returns on these two investments should be the same

Question 2

What is the difference between CIP and UIP?

Answer 2

Unlike CIP, under UIP exchange rate risk is not hedged, so investors are exposed to future exchange rate movements as there is no future contract

Question 3

Under UIP, what is the expected appreciation or depreciation of the currency equal to?

Answer 3

Interest rate differentials

Question 4

What does the unbiasedness hypothesis say?

Answer 4

That there is no systematic difference between the forward rate and the expected future spot rate

Question 5

What is market inefficiency?

Answer 5

Interest rate differentials contain information from which profit can be obtained

Question 6

What is carry trade?

Answer 6

Going long with currencies with largest forward discounts against USD (F>S) and vice versa

Question 7

What does carry trade hope for?

Answer 7

Hopes that the spot exchange rate does not move too much against you so that you can profit from the interest differential