Covered Interest Rate Parity Calculator

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✖Current Spot Exchange Rate is the current exchange rate between two currencies.ⓘ Current Spot Exchange Rate [e_o]			+10% -10%
✖Foreign Interest Rate refers to the prevailing interest rates in a foreign country.ⓘ Foreign Interest Rate [r_f]			+10% -10%
✖Domestic Interest Rate refers to the interest rate applicable to financial instruments within a particular country.ⓘ Domestic Interest Rate [r_d]			+10% -10%

✖Forward Exchange Rate is the exchange rate at which a bank agrees to exchange one currency for another at a future date when it enters into a forward contract with an investor.ⓘ Covered Interest Rate Parity [F]

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Covered Interest Rate Parity Solution

STEP 0: Pre-Calculation Summary

Formula Used

Forward Exchange Rate = (Current Spot Exchange Rate)*((1+Foreign Interest Rate)/(1+Domestic Interest Rate))
F = (e_o)*((1+r_f)/(1+r_d))
This formula uses 4 Variables

Variables Used

Forward Exchange Rate - Forward Exchange Rate is the exchange rate at which a bank agrees to exchange one currency for another at a future date when it enters into a forward contract with an investor.
Current Spot Exchange Rate - Current Spot Exchange Rate is the current exchange rate between two currencies.
Foreign Interest Rate - Foreign Interest Rate refers to the prevailing interest rates in a foreign country.
Domestic Interest Rate - Domestic Interest Rate refers to the interest rate applicable to financial instruments within a particular country.

STEP 1: Convert Input(s) to Base Unit

Current Spot Exchange Rate: 150 --> No Conversion Required
Foreign Interest Rate: 0.2 --> No Conversion Required
Domestic Interest Rate: 0.9 --> No Conversion Required

STEP 2: Evaluate Formula

Substituting Input Values in Formula

F = (e_o)*((1+r_f)/(1+r_d)) --> (150)*((1+0.2)/(1+0.9))

Evaluating ... ...

F = 94.7368421052632

STEP 3: Convert Result to Output's Unit

94.7368421052632 --> No Conversion Required

FINAL ANSWER

94.7368421052632 ≈ 94.73684 <-- Forward Exchange Rate

(Calculation completed in 00.004 seconds)

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Created by Keerthika Bathula

Indian Institute of Technology, Indian School of mines, Dhanbad (IIT ISM Dhanbad), Dhanbad

Keerthika Bathula has created this Calculator and 100+ more calculators!

Verified by Vishnu K

BMS College of Engineering (BMSCE), Bangalore

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< International Finance Calculators

Balance of Financial Account

LaTeX Go Balance of Financial Account = Net Direct Investment+Net Portfolio Investment+Asset Funding+Errors and Omissions

Covered Interest Rate Parity

LaTeX Go Forward Exchange Rate = (Current Spot Exchange Rate)*((1+Foreign Interest Rate)/(1+Domestic Interest Rate))

International Fisher Effect using Interest Rates

LaTeX Go Change in Exchange Rate = ((Domestic Interest Rate-Foreign Interest Rate)/(1+Foreign Interest Rate))

International Fischer Effect using Spot Rates

LaTeX Go Change in Exchange Rate = (Current Spot Exchange Rate/Spot Rate in Future)-1

Covered Interest Rate Parity Formula

LaTeX Go

Forward Exchange Rate = (Current Spot Exchange Rate)*((1+Foreign Interest Rate)/(1+Domestic Interest Rate))
F = (e_o)*((1+r_f)/(1+r_d))

What is Covered Interest Rate Parity?

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. The covered interest rate parity situation means there is no opportunity for arbitrage using forward contracts, which often exists between countries with different interest rates.Covered interest rate parity is a no-arbitrage condition that could be used in the foreign exchange markets to determine the forward foreign exchange rate. The condition also states that investors could hedge foreign exchange risk or unforeseen fluctuations in exchange rates (with forward contracts).

How to Calculate Covered Interest Rate Parity?

Covered Interest Rate Parity calculator uses Forward Exchange Rate = (Current Spot Exchange Rate)*((1+Foreign Interest Rate)/(1+Domestic Interest Rate)) to calculate the Forward Exchange Rate, The 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. Forward Exchange Rate is denoted by F symbol.

How to calculate Covered Interest Rate Parity using this online calculator? To use this online calculator for Covered Interest Rate Parity, enter Current Spot Exchange Rate (e_o), Foreign Interest Rate (r_f) & Domestic Interest Rate (r_d) and hit the calculate button. Here is how the Covered Interest Rate Parity calculation can be explained with given input values -> 94.73684 = (150)*((1+0.2)/(1+0.9)).

FAQ

What is Covered Interest Rate Parity?

The 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 and is represented as F = (e_o)*((1+r_f)/(1+r_d)) or Forward Exchange Rate = (Current Spot Exchange Rate)*((1+Foreign Interest Rate)/(1+Domestic Interest Rate)). Current Spot Exchange Rate is the current exchange rate between two currencies, Foreign Interest Rate refers to the prevailing interest rates in a foreign country & Domestic Interest Rate refers to the interest rate applicable to financial instruments within a particular country.

How to calculate Covered Interest Rate Parity?

The 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 is calculated using Forward Exchange Rate = (Current Spot Exchange Rate)*((1+Foreign Interest Rate)/(1+Domestic Interest Rate)). To calculate Covered Interest Rate Parity, you need Current Spot Exchange Rate (e_o), Foreign Interest Rate (r_f) & Domestic Interest Rate (r_d). With our tool, you need to enter the respective value for Current Spot Exchange Rate, Foreign Interest Rate & Domestic Interest Rate and hit the calculate button. You can also select the units (if any) for Input(s) and the Output as well.

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