Covered interest rate parity -- doesn't matter where you invest -- you'll have the same domestic currency return as long as the foreign exchange risk is covered using a forward contract.
Uncovered interest rate parity -- domestic and foreign investments have same expected returns.
Unbiasedness hypothesis -- no systematic differences between the forward rate and the expected future spot rate. If hypothesis holds, the expected return on currency speculation will be exactly zero.
Forecast error -- the differences between the actual future spot exchange rate and its forecast.
Unbiased predictors -- implies expected forecast error = 0
Market inefficiency -- interest rate differentials contain information from which profit can be obtained; exploiting forward bias and carry trades (represents the interest rate differentials between the high and the low yield currencies, i.e.: borrowing low interest rate currencies and lending high interest rate currencies). If the high interest rate currency fails to depreciate as much as the interest rate differential, the carry forward has a positive return.
Sharpe ratio: excess return per unit of risk; a measure of the risk trade-off on an asset or a portfolio of assets; the ratio of average asset return / the standard deviation.
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