Exchange rate adjustment to the covered interest rate parity in Brazil

Abstract

This paper analyzes the adjustment of the covered interest rate parity equation between the Brazilian real and the US dollar. The objective is to evaluate the short-term response of the spot and future exchange rates to shocks in interest rate differential and country risk. The econometric research shows that the adjustment of the covered parity in Brazil occurs with the movement of the spot and future exchange rates in the same direction - an exchange appreciation due to the increase of the interest rate differential and exchange depreciation in the case of the increase of the country risk - but with a higher volatility of the spot exchange rate.

Keywords
covered interest rate parity; exchange rate; future market