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Covered Interest Rate Parity Formula

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Forward Exchange Rate is the exchange rate at which a bank agrees to exchange one currency for another at a future date when it enters into a forward contract with an investor. Check FAQs

F = (e o) \cdot (\frac{1 + r f}{1 + r d})

F - Forward Exchange Rate?e_o - Current Spot Exchange Rate?r_f - Foreign Interest Rate?r_d - Domestic Interest Rate?

Covered Interest Rate Parity Example

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With units

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Here is how the Covered Interest Rate Parity equation looks like with Values.

Here is how the Covered Interest Rate Parity equation looks like with Units.

Here is how the Covered Interest Rate Parity equation looks like.

94.7368 = (150) \cdot (\frac{1 + 0.2}{1 + 0.9})

94.7368 = (150) \cdot (\frac{1 + 0.2}{1 + 0.9})

94.7368 = (150) \cdot (\frac{1 + 0.2}{1 + 0.9})

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Covered Interest Rate Parity Solution

Follow our step by step solution on how to calculate Covered Interest Rate Parity?

FIRST Step Consider the formula

F = (e o) \cdot (\frac{1 + r f}{1 + r d})

Next Step Substitute values of Variables

∴

F = (150) \cdot (\frac{1 + 0.2}{1 + 0.9})

Next Step Prepare to Evaluate

∴

F = (150) \cdot (\frac{1 + 0.2}{1 + 0.9})

Next Step Evaluate

∴

F = 94.7368421052632

LAST Step Rounding Answer

∴

F = 94.7368

Covered Interest Rate Parity Formula Elements

Variables

Forward Exchange Rate

Forward Exchange Rate is the exchange rate at which a bank agrees to exchange one currency for another at a future date when it enters into a forward contract with an investor.

Symbol: F

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Forward Exchange Rate

Current Spot Exchange Rate

Current Spot Exchange Rate is the current exchange rate between two currencies.

Symbol: e_o

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Current Spot Exchange Rate

Foreign Interest Rate

Foreign Interest Rate refers to the prevailing interest rates in a foreign country.

Symbol: r_f

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Foreign Interest Rate

Domestic Interest Rate

Domestic Interest Rate refers to the interest rate applicable to financial instruments within a particular country.

Symbol: r_d

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Domestic Interest Rate

Other formulas in International Finance category

Go Balance of Financial Account

BOF = NDI + NPI + A + E

Go International Fisher Effect using Interest Rates

ΔE = (\frac{r d - r f}{1 + r f})

Go International Fischer Effect using Spot Rates

ΔE = (\frac{e o}{e t}) - 1

Go Current Account Balance

CAB = X - I + NY + NCT

How to Evaluate Covered Interest Rate Parity?

Covered Interest Rate Parity evaluator uses Forward Exchange Rate = (Current Spot Exchange Rate)*((1+Foreign Interest Rate)/(1+Domestic Interest Rate)) to evaluate the Forward Exchange Rate, The Covered Interest Rate Parity refers to a theoretical condition in which the relationship between interest rates and the spot and forward currency values of two countries are in equilibrium. Forward Exchange Rate is denoted by F symbol.

How to evaluate Covered Interest Rate Parity using this online evaluator? To use this online evaluator for Covered Interest Rate Parity, enter Current Spot Exchange Rate (e_o), Foreign Interest Rate (r_f) & Domestic Interest Rate (r_d) and hit the calculate button.

FAQs on Covered Interest Rate Parity

What is the formula to find Covered Interest Rate Parity?

The formula of Covered Interest Rate Parity is expressed as Forward Exchange Rate = (Current Spot Exchange Rate)*((1+Foreign Interest Rate)/(1+Domestic Interest Rate)). Here is an example- 94.73684 = (150)*((1+0.2)/(1+0.9)).

How to calculate Covered Interest Rate Parity?

With Current Spot Exchange Rate (e_o), Foreign Interest Rate (r_f) & Domestic Interest Rate (r_d) we can find Covered Interest Rate Parity using the formula - Forward Exchange Rate = (Current Spot Exchange Rate)*((1+Foreign Interest Rate)/(1+Domestic Interest Rate)).

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Covered Interest Rate Parity Formula

Covered Interest Rate Parity Example

Covered Interest Rate Parity Solution

Covered Interest Rate Parity Formula Elements

Other formulas in International Finance category

How to Evaluate Covered Interest Rate Parity?

FAQs on Covered Interest Rate Parity

Variable Name