Even though UIP is shown to hold within a small range on average, some deviations allow systematic profits to be made. This violates all of the following principles, EXCEPT:
A) rational expectations with no systematic bias.
B) efficient markets hypothesis, which postulates that all traders are operating with the same information.
C) random deviations in exchange rates around their mean.
D) rational expectations with systematic bias.

Question

Quizplus · Accepted Answer

The violation of rational expectations with systematic bias allows for profitable opportunities even if UIP holds only within a small range. Rational expectations with no systematic bias, efficient markets hypothesis, and random deviations in exchange rates around their mean would all be violated if profitable opportunities existed.

Even Though UIP Is Shown to Hold Within a Small