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Interest Rate Parity Formula

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The Forward Rate Constant is defined as the rate constant for the forward occurring reaction. Check FAQs

k f = Sp \cdot (\frac{1 + I Q}{1 + I B})

k_f - Forward Rate Constant?Sp - Spot Exchange Rate?I_Q - Interest Rate of Quote Currency?I_B - Interest Rate of Base Currency?

Interest Rate Parity Example

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

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

Here is how the Interest Rate Parity equation looks like.

27.2519 = 21 \cdot (\frac{1 + 16}{1 + 12.1})

27.2519 = 21 \cdot (\frac{1 + 16}{1 + 12.1})

27.2519 = 21 \cdot (\frac{1 + 16}{1 + 12.1})

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Interest Rate Parity Solution

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

FIRST Step Consider the formula

k f = Sp \cdot (\frac{1 + I Q}{1 + I B})

Next Step Substitute values of Variables

∴

k f = 21 \cdot (\frac{1 + 16}{1 + 12.1})

Next Step Prepare to Evaluate

∴

k f = 21 \cdot (\frac{1 + 16}{1 + 12.1})

Next Step Evaluate

∴

k f = 27.2519083969466

LAST Step Rounding Answer

∴

k f = 27.2519

Interest Rate Parity Formula Elements

Variables

Forward Rate Constant

The Forward Rate Constant is defined as the rate constant for the forward occurring reaction.

Symbol: k_f

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Forward Rate Constant

Spot Exchange Rate

Spot Exchange Rate is the current amount one currency will trade for another currency at a specific point in time.

Symbol: Sp

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Spot Exchange Rate

Interest Rate of Quote Currency

Interest Rate of Quote Currency is the interest rate set by the central bank that issues the quote currency.

Symbol: I_Q

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Interest Rate of Quote Currency

Interest Rate of Base Currency

Interest Rate of Base Currency is the short-term or money-market interest rate of the currency that, in a currency pair, is quoted first.

Symbol: I_B

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Interest Rate of Base Currency

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How to Evaluate Interest Rate Parity?

Interest Rate Parity evaluator uses Forward Rate Constant = Spot Exchange Rate*((1+Interest Rate of Quote Currency)/(1+Interest Rate of Base Currency)) to evaluate the Forward Rate Constant, The Interest Rate Parity formula is defined as a theory according to which the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate. Forward Rate Constant is denoted by k_f symbol.

How to evaluate Interest Rate Parity using this online evaluator? To use this online evaluator for Interest Rate Parity, enter Spot Exchange Rate (Sp), Interest Rate of Quote Currency (I_Q) & Interest Rate of Base Currency (I_B) and hit the calculate button.

FAQs on Interest Rate Parity

What is the formula to find Interest Rate Parity?

The formula of Interest Rate Parity is expressed as Forward Rate Constant = Spot Exchange Rate*((1+Interest Rate of Quote Currency)/(1+Interest Rate of Base Currency)). Here is an example- 27.25191 = 21*((1+16)/(1+12.1)).

How to calculate Interest Rate Parity?

With Spot Exchange Rate (Sp), Interest Rate of Quote Currency (I_Q) & Interest Rate of Base Currency (I_B) we can find Interest Rate Parity using the formula - Forward Rate Constant = Spot Exchange Rate*((1+Interest Rate of Quote Currency)/(1+Interest Rate of Base Currency)).

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Interest Rate Parity Formula

Interest Rate Parity Example

Interest Rate Parity Solution

Interest Rate Parity Formula Elements

Other formulas in Forex Management category

How to Evaluate Interest Rate Parity?

FAQs on Interest Rate Parity

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