Interest rate parity

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(IRP).

This theory describes the expected relationship between spot rate 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.


See also