2. The best explanation of why this prediction may not be very accurate is that:
A. covered interest rate parity does hold in this case.
B. the forward points indicate that a riskless arbitrage opportunity exists.
C. there is no arbitrage condition that forces uncovered interest rate
parity to hold.
Solution
C is correct. There is no arbitrage condition that forces uncovered interest
rate parity to hold. In contrast, arbitrage virtually always ensures that covered interest rate parity holds. This is the case for our table, where the −139
point discount is calculated from the covered interest rate parity equation.
