Interest Rate Parity Formula

Interest rate parity is a theory in which the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate. Covered interest rate parity refers to a theoretical condition in which the relationship between interest rates and the spot and forward currency values of two countries are in equilibrium.

Interest Rate Parity Youtube

The fact that this condition does not always hold allows for potential opportunities to earn riskless profits from covered interest arbitrage two assumptions central to interest rate parity are capital.

Interest rate parity formula. Interest rate parity is a theory that suggests a strong relationship between interest rates and the movement of currency values. Interest rate parity irp is a theory in which the differential between the interest rates of two countries remains equal to the differential calculated by using the forward exchange rate and the spot exchange rate techniques. Interest rate parity is a theory proposing a relationship between the interest rates of two given currencies and the spot and forward exchange rates between the currencies.

It can be used to predict the movement of exchange rates between two currencies when the risk free interest rates of the two currencies are known. Interest rate parity connects interest spot exchange and foreign. Interest rate parity is a no arbitrage condition representing an equilibrium state under which investors will be indifferent to interest rates available on bank deposits in two countries.

In fact you can predict what a future exchange rate will be simply by looking at the difference in interest rates in two countries.

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