Which of the following statements about the covered interest parity is (are) correct? Choose all...
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Which of the following statements about the covered interest parity is (are) correct? Choose all correct answers. CIP states the joint-determination relations among the spot exchange rate, interest rates in two currencies and the forward exchange rate. CIP always holds between any two currencies. The UIP hypothesis states that high interest-rate currencies should depreciate on average relative to low interest-rate currencies. Carry trades are profitable on average but bankrupted many investors from time to time in the history (or, carry trades have very high tail risks). UIP and CIP are two ways to express the same parity relation between the forward exchange rate, spot rate and interest rates. UIP predicts the currency movement in the correct direction (or, the UIP hypothesis holds) that is precisely why carry trade makes money. In fully integrated capital markets, we can estimate the forward exchange rate with the spot exchange rate and interest rates in two currencies
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