Uncovered Interest Rate Parity
Uncovered interest rate parity (UIP) theory states that the difference in interest rates between two countries will equal the relative change in currency foreign exchange rates over the same period. It is one form of interest rate parity (IRP) used alongside covered interest rate parity.If the uncovered interest rate parity relationship does not hold, then there is an opportunity to make a risk-free profit using currency arbitrage or Forex arbitrage.