A clarification of the interest rate parity theorem

Recognition of the role of market-makers in the euro-deposit and exchange markets, makes it necessary to re-formulate the interest rate parity theorem's predicted equilibrium relationship between forward exchange rates and interest rates in terms of a set of inequalities, rather than an equation. A euro-bank quotes typically for two-way business in euro-currency deposits swaps, outright forward exchange and spot exchange. It must decide whether to quote for each directly or indirectly, by combining quotes from two or more of the other markets. Where indirect (satellite) quotation prevails the inequalities collapse into continuous identities. Market conditions which favour direct compared to indirect quotation are assessed.