uncovered interest parity

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A relationship between domestic and foreign interest rates derived under the assumption that the forward currency market is not used to hedge exchange rate risk. Uncovered interest parity requires(1 + ra) = (1 + rb)e0/E(e1)where ra is the domestic interest rate, rb is the foreign interest rate, e0 the current exchange rate, and E(e1) the expected future exchange rate. See also covered interest parity.

(1 + ra) = (1 + rb)e0/E(e1)

Subjects: Economics.

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