Interest rate parity

(IRP).

This theory describes the expected relationship between spot and forward forward exchange rates, and the interest rates in the related currency pair.

Under efficient market conditions the interest rate parity theory predicts that the forward FX rate (available in the market today) should be equal to the spot FX rate, adjusted for the difference in interest rates between the currency pair over the relevant period.

See also

• Covered interest arbitrage
• Efficient market hypothesis
• Foreign exchange
• Forward forward rate
• Four way equivalence model
• Interest rate
• Spot rate