Arbitrage in restoring the covered interest parity condition

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Suppose as a result of a number of factors, the Rand to dollar exchange rate is expected to strengthen (appreciate) from 15.20/$ to 13.50/$. What effect would this have on the expected rate of depreciation? in which direction would uncovered capital flows move? How would traders and speculators in the forward market react to this change in expectations, and what would be the effect on the forward margin? lastly given the change in the forward market identified above, explain the role of the covered interest arbitrage in restoring the covered interest parity condition.

Reference no: EM131902298

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