when uncovered interest rate parity holds there can be no excess return earned from simultaneously going long a higher yielding currency investment and shorting a different lower yielding currency investment or interest rate spread uncovered interest rate parity assumes that the country with the higher interest rate or risk free money market yield will experience depreciation in its domestic currency relative to the foreign currency 
uip is related to the so called law of one price which is an economic theory that states the price of an identical security commodity or product traded anywhere in the world should have the same price regardless of location when currency exchange rates are taken into consideration if it is traded in a free market with no trade restrictions the law of one price exists because differences between asset prices in different locations should eventually be eliminated due to the arbitrage opportunity the law of one price theory is the underpinning of the concept of purchasing power parity ppp purchasing power parity states that the value of two currencies is equal when a basket of identical goods is priced the same in both countries this relates to a formula that can be applied to compare securities across markets that trade in different currencies as exchange rates can shift frequently the formula can be recalculated on a regular basis to identify mispricings across various international markets the difference between covered interest rate parity and uncovered interest rate paritycovered interest parity cip involves using forward or futures contracts to cover exchange rates which can thus be hedged in the market meanwhile uncovered interest rate parity uip involves forecasting rates and not covering exposure to foreign exchange risk that is there are no forward rate contracts and it uses only the expected spot rate there is no theoretical difference between covered and uncovered interest rate parity when the forward and expected spot rates are the same limitations of uncovered interest paritythere is only limited evidence to support uip but economists academics and analysts still use it as a theoretical and conceptual framework to represent rational expectation models uip requires the assumption that capital markets are efficient empirical evidence has shown that over the short and medium term time periods the level of depreciation of the higher yielding currency is less than the implications of uncovered interest rate parity many times the higher yielding currency has strengthened instead of weakened 