Interest Rate Parity Calculator
Calculate currency forward prices using covered and uncovered interest rate parity theories
Calculate Currency Forward Price
Current exchange rate in the market
Price currency / Base currency
Annual interest rate of the price currency
Annual interest rate of the base currency
Duration until contract settlement (typically 30, 60, 90, 180, or 360 days)
Interest Rate Parity Results
Formula used: F = S × (1 + rp) / (1 + rb)
Example Calculation
USD/EUR Forward Contract Example
Currency Forward: USD/EUR
Contract Duration: 90 days
Current Spot Rate: 0.1735
USD Interest Rate (Price): 0.8% annually
EUR Interest Rate (Base): 3.2% annually
Covered IRP Calculation
1. Adjusted USD rate: 0.8% × (90/360) = 0.2%
2. Adjusted EUR rate: 3.2% × (90/360) = 0.8%
3. Forward Price = 0.1735 × (1.002 / 1.008)
Forward Price = 0.1725
Key Concepts
Covered IRP
Uses hedging to eliminate risk
F = S × (1 + rp) / (1 + rb)
Uncovered IRP
Based on exchange rate expectations
F = S × (1 + (rp - rb))
Arbitrage
Risk-free profit from price differences
Drives IRP equilibrium
Trading Tips
Higher interest rates typically lead to currency appreciation
IRP assumes perfect capital mobility and no transaction costs
Forward premiums/discounts reflect interest rate differentials
Market frictions can cause deviations from theoretical prices
Understanding Interest Rate Parity
What is Interest Rate Parity?
Interest Rate Parity (IRP) is a financial theory that establishes the relationship between interest rates and currency exchange rates. It suggests that the difference in interest rates between two countries equals the expected change in their exchange rates.
Why is it Important?
- •Helps price currency forward contracts
- •Identifies arbitrage opportunities
- •Guides international investment decisions
- •Enables currency risk management
Formula Explanations
Covered: F = S × (1 + rp) / (1 + rb)
Uncovered: F = S × (1 + (rp - rb))
- F: Forward exchange rate
- S: Current spot exchange rate
- rp: Price currency interest rate
- rb: Base currency interest rate
Note: Interest rates must be adjusted for the time period using (days/360) convention
Covered vs Uncovered IRP
- ✓Covered IRP: Uses forward contracts to eliminate currency risk
- ✓Uncovered IRP: Relies on expected exchange rate changes
- •Covered IRP is more reliable due to hedging
- •Uncovered IRP assumes rational expectations
Market Applications
- ⚡Currency Hedging: Manage foreign exchange risk
- ⚡Arbitrage Trading: Exploit price discrepancies
- ⚡Investment Analysis: Compare international returns
- ⚡Central Banking: Monetary policy implications