A 2008 plot twist
CIP held for decades—until the 2008 crisis. Dollar funding stress created a “basis” that made forwards diverge from theory.
CIP gap
Interest Rate Parity (IRP) Calculator
Options
Shown before numbers for domestic amounts/rates where relevant.
Shown before numbers for foreign outputs.
Affects formatted outputs (not the internal precision).
We’ll keep the forward in the same convention as the spot.
Method
Tip Use Covered to price a forward from spot + interest rates. Use Implied to back out a rate from spot & a market forward. UIP provides a simple expected spot from rate differentials (theory, not a forecast).
Covered IRP — Forward Pricing
Let S be the spot rate, rd domestic, rf foreign, and T years.
With growth factors Gd, Gf from your compounding choice:
F = S × (Gd / Gf)
In the selected quote convention.
Or leave blank and use years.
We’ll report CIP deviation vs. model.
We’ll convert using the model forward.
Implied Rate — From Spot & Forward
Given S, F, tenor T, and one rate (rd or rf) with compounding, solve the other from
F / S = Gd / Gf.
Enter rd if solving rf, or rf if solving rd.
Uncovered IRP — Expected Spot
A simple UIP view uses the same growth ratio for an expected future spot:
E[ST] ≈ S × (Gd / Gf)
Results
Notes: Match your compounding and day-count to quoted rates. CIP is a pricing identity under no-arbitrage assumptions; UIP is an economic hypothesis (not a forecast).
Interest Rate Parity — Quick Guide
Interest rate parity links currency exchange rates and interest rates. This calculator helps you see how today’s spot rate, forward rate, and interest rates should line up under no-arbitrage assumptions. It is a practical tool for students, analysts, and anyone pricing a currency forward or checking whether a quoted forward rate looks consistent.
Covered interest rate parity (CIP) says that if you hedge currency risk with a forward contract, the return on a domestic deposit should match the return on a foreign deposit once the forward rate is applied. In simple terms, the forward rate adjusts for the interest rate difference between two currencies. The calculator uses the relationship F = S x (Gd/Gf), where G represents the growth factor from interest and time.
Uncovered interest rate parity (UIP) is similar but assumes you do not hedge. It uses the interest rate differential to form an expected future spot rate. UIP is a classic idea in economics, but it is better viewed as a teaching model than a reliable forecast, especially over short horizons.
Implied rate is the reverse problem: if you know the spot, forward, and one currency’s rate, you can solve for the other rate that would make CIP hold. This is useful for checking consistency between market quotes or understanding the forward points embedded in the price.
How to use the calculator:
- Choose whether you want to compute a forward rate, an implied rate, or a UIP expected spot.
- Enter the spot rate and any known forward rate, using the same quote convention.
- Input the domestic and foreign interest rates, plus the tenor in days or years.
- Select the compounding method that matches the rate convention you are using.
- Click Calculate to see the parity results and any implied values.
Real-world uses: this tool helps compare forward quotes, evaluate hedging costs, and sanity-check FX pricing in a treasury or trading context. It also helps students practice covered vs. uncovered parity and see how forward points relate to rate differentials.
Conventions matter: keep spot and forward quotes consistent (D/1F or F/1D), and match your day-count and compounding to the rate source. Small differences can change the result.
All calculations run locally in your browser; nothing leaves your device.
5 Fun Facts about Interest Rate Parity
Premium vs. points
Positive domestic–foreign rate spreads show up as forward points. Flip the quote convention and that premium becomes a discount.
Quote magic
Small r, big tenor
A tiny 0.25% rate gap barely moves a 1M forward, but can swing a 5Y forward by several percent—time stretches parity effects.
Time amplification
Negative rates flip intuition
When a currency has negative rates, its forward can sit below spot even if it’s “strong”—parity cares about carry, not sentiment.
Carry, not vibe
Forward points ≠ forecast
CIP forward levels are a no-arbitrage price, not a guess of where spot will land. Markets often trade far from that path.
Price vs. view