Covered interest parity holds very closely in normal markets because any gap would be arbitraged away; small deviations appeared after 2008 because of bank balance-sheet costs.
How to use the Interest Rate Parity Calculator
- Spot rate (quote per base)
- Interest rate – quote currency
- Interest rate – base currency
- Time
- Quoted forward rate (optional)
Results update as you type, and every field accepts the units shown in its menu.
How it works
Enter the spot rate (quote currency per base unit), the two interest rates, the time in years and an optional quoted forward rate.
Tips
- Use real (inflation-adjusted) figures to compare across years.
- Check whether data are seasonally adjusted.
- Use the same currency and base year throughout.
- Economic models simplify reality – treat results as illustrations, not forecasts.
Common mistakes to avoid
- Mixing nominal and real values.
- Comparing percentage changes with percentage-point changes.
- Treating correlations as causes.
Inputs explained
| Field | What to enter |
|---|---|
| Spot rate (quote per base) | A number |
| Interest rate – quote currency | In % |
| Interest rate – base currency | In % |
| Time | In years |
| Quoted forward rate (optional) | A number |
What each result means
- Parity forward rate = [Spot rate (quote per base)]×((1 + [Interest rate – quote currency]÷100)÷(1 + [Interest rate – base currency]÷100))^[Time]
- Quoted minus parity forward = [Quoted forward rate (optional)] – [Parity forward rate]
Example values
How the main result changes when Spot rate changes and everything else stays at the example values above:
| Spot rate (quote per base) | Parity forward rate |
|---|---|
| 0.635 | 0.6396 |
| 0.9525 | 0.9594 |
| 1.27 | 1.2792 |
| 1.59 | 1.599 |
| 1.91 | 1.9188 |
| 2.54 | 2.5584 |
Formula
Forward = spot × (1 + i_quote)^t ÷ (1 + i_base)^tArbitrage profit per unit = quoted forward − parity forward (if different)Worked example
Inputs — Spot rate (quote per base): 1.27; Interest rate – quote currency: 4.5 %; Interest rate – base currency: 3.75 %; Time: 1 years; Quoted forward rate (optional): 1.28.
Results — Parity forward rate = 1.27918; Quoted minus parity forward = 0.00082; Arbitrage = Forward overpriced: borrow quote currency, sell it forward.
Frequently asked questions
What is interest rate parity?
The theory that interest rate differences are offset by forward exchange rates.
What is covered vs uncovered parity?
Covered uses forward contracts; uncovered relies on expected spot rates.
Does interest rate parity hold?
Covered parity holds closely; uncovered parity often doesn't.
What formula does the Interest Rate Parity Calculator use?
Forward = spot × (1 + i_quote)^t ÷ (1 + i_base)^t.