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Interest Rate Parity (IRP)

Quick answer

F = S × (1+i_d) ÷ (1+i_f): at spot 1.1000, 3% domestic and 5% foreign rates, the 1-year forward sits at 1.0790.

  • Formula and worked example included.

Figures are estimates from this calculator’s standard formula — adjust the inputs in the tool below for your exact number.

How the Interest Rate Parity Calculator Calculates Results

Forward = Spot × (1 + domestic rate) ÷ (1 + foreign rate)

Interest rate parity ties forward exchange rates to the interest gap between two currencies. The lower-rate currency must trade at a forward premium to prevent arbitrage. The computation rests on Forward = Spot × (1 + domestic rate) ÷ (1 + foreign rate). With spot 1.1000, a 3% domestic and a 5% foreign rate: F = 1.1000 × 1.03 ÷ 1.05 = 1.0790 — the forward moves 1.9% against the higher-rate currency. Each input you type is substituted the instant you release the key, and the result is expressed in exactly the units or currency you chose.

  1. 1

    Step 1

    Start with the primary figures the Interest Rate Parity Calculator asks for.

  2. 2

    Step 2

    Your values are substituted into Forward = Spot × (1 + domestic rate) ÷ (1 + foreign rate).

  3. 3

    Step 3

    Read off the computed result.

  4. 4

    Step 4

    Vary one input at a time to see its effect.

Use Cases

Hedging foreign exposure

Pricing the hedge cost implied by rates

Carry trade analysis

Comparing yield pick-up against forward drag

Cross-border deposit choice

Equalizing home and foreign money markets

Corporate treasury planning

Budgeting forwards for receivables

Common Mistakes

  • Appreciation intuition

  • Using wrong quote side

  • Ignoring bid-ask spreads

FAQs

Why does the high-rate currency trade at a discount?

Elsewhere you could borrow at 3%, convert, invest at 5% and lock the forward for riskless profit — parity closes that door.

What is covered vs uncovered parity?

Covered uses actual forward contracts (arbitrage-enforced); uncovered assumes forwards equal expected future spots — a hypothesis, not a guarantee.

What is the math behind the Interest Rate Parity Calculator?

The Interest Rate Parity Calculator applies Forward = Spot × (1 + domestic rate) ÷ (1 + foreign rate), where covered parity eliminates currency arbitrage between the two money markets.

Do I need an account or app?

No account and no app — the Interest Rate Parity Calculator is a web tool that keeps working even on a slow connection.

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