## Interest Rate Parity

kaushalya.narendran
Posts: 7
Joined: Sat Jan 11, 2014 2:11 pm

### Interest Rate Parity

Please explain the concept of Interest Rate Parity

Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm

### Interest Rate Parity

Interest rate parity is about to explain the relation of Spot rate and Forward rate. Which means the difference between spot rate and forward rate should be equal to differences between interest rate of two countries.
And in this relation If the interest rate of any country is higher it means they are depreciating in value.

Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm

### Interest Rate Parity

Formula wise it can be defined as Forward Rate = Spot Rate X (1 + Interest Rate of Overseas country) /
(1 + Interest Rate of Domestic country)
Suppose that the spot rate for the Canadian dollar is presently 1 USD = 1.0550 CAD. One-year interest rates (priced off the zero-coupon yield curve) are at 4.15% for the U.S. dollar and 3.50% for the Canadian dollar. Using the above formula, the one-year forward rate is computed as follows: =1.055*1.0415/1.035 = 1.0616