ISO and Interest rate parity: Difference between pages
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(IRP). | |||
This theory describes the expected relationship between [[Spot rate|spot]] and [[Forward forward rate|forward foreign exchange rates]], and the [[Interest rate|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. | |||
IRP holds very strongly for actively traded currency pairs; less so for currencies which are not so actively traded. | |||
== See also == | |||
* [[CertFMM]] | |||
* [[Covered interest arbitrage]] | |||
* [[Efficient market hypothesis]] | |||
* [[Foreign exchange]] | |||
* [[Forward forward rate]] | |||
* [[Four way equivalence model]] | |||
* [[Interest rate]] | |||
* [[No arbitrage conditions]] | |||
* [[Spot rate]] | |||
[[Category:Manage_risks]] | |||
Revision as of 20:18, 28 April 2016
(IRP).
This theory describes the expected relationship between spot and forward foreign 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.
IRP holds very strongly for actively traded currency pairs; less so for currencies which are not so actively traded.
