Interest Rate Parity Calculator

✖Spot Exchange Rate is the current amount one currency will trade for another currency at a specific point in time.ⓘ Spot Exchange Rate [Sp]			+10% -10%
✖Interest Rate of Quote Currency is the interest rate set by the central bank that issues the quote currency.ⓘ Interest Rate of Quote Currency [I_Q]			+10% -10%
✖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.ⓘ Interest Rate of Base Currency [I_B]			+10% -10%

✖The Forward Rate Constant is defined as the rate constant for the forward occurring reaction.ⓘ Interest Rate Parity [k_f]

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Formula

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Interest Rate Parity

Formula

`"k"_{"f"} = "Sp"*((1+"I"_{"Q"})/(1+"I"_{"B"}))`

Example

`"27.25191"="21"*((1+"16")/(1+"12.1"))`

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Interest Rate Parity Solution

STEP 0: Pre-Calculation Summary

Formula Used

Forward Rate Constant = Spot Exchange Rate*((1+Interest Rate of Quote Currency)/(1+Interest Rate of Base Currency))
k_f = Sp*((1+I_Q)/(1+I_B))
This formula uses 4 Variables

Variables Used

Forward Rate Constant - The Forward Rate Constant is defined as the rate constant for the forward occurring reaction.
Spot Exchange Rate - Spot Exchange Rate is the current amount one currency will trade for another currency at a specific point in time.
Interest Rate of Quote Currency - Interest Rate of Quote Currency is the interest rate set by the central bank that issues the 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.

STEP 1: Convert Input(s) to Base Unit

Spot Exchange Rate: 21 --> No Conversion Required
Interest Rate of Quote Currency: 16 --> No Conversion Required
Interest Rate of Base Currency: 12.1 --> No Conversion Required

STEP 2: Evaluate Formula

Substituting Input Values in Formula

k_f = Sp*((1+I_Q)/(1+I_B)) --> 21*((1+16)/(1+12.1))

Evaluating ... ...

k_f = 27.2519083969466

STEP 3: Convert Result to Output's Unit

27.2519083969466 --> No Conversion Required

FINAL ANSWER

27.2519083969466 ≈ 27.25191 <-- Forward Rate Constant

(Calculation completed in 00.020 seconds)

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< 14 Forex Management Calculators

Black-Scholes-Merton Option Pricing Model for Call Option

Go Theoretical Price of Call Option = Current Stock Price*Normal Distribution*(Cumulative Distribution 1)-(Option Strike Price*exp(-Risk Free Rate*Time to Expiration of Stock))*Normal Distribution*(Cumulative Distribution 2)

Cumulative Distribution One

Go Cumulative Distribution 1 = (ln(Current Stock Price/Option Strike Price)+(Risk Free Rate+Volatile Underlying Stock^2/2)*Time to Expiration of Stock)/(Volatile Underlying Stock*sqrt(Time to Expiration of Stock))

Fama-French Three-Factor Model

Go Excess Return on Asset = Asset Specific Alpha+Beta in Forex*(Return on Market Portfolio-Risk Free Rate)+(Sensitivity of the Asset to SMB*Small Minus Big+Sensitivity of the Asset to HML+Error Term)

Vasicek Interest Rate

Go Derivative of Short Rate = Speed of Mean Reversal*(Long Term Mean-Short Rate)*Derivatives*Time Period+Volatility at Time*Derivatives*Random Market Risk

Black-Scholes-Merton Option Pricing Model for Put Option

Go Theoretical Price of Put Option = Option Strike Price*exp(-Risk Free Rate*Time to Expiration of Stock)*(-Cumulative Distribution 2)-Current Stock Price*(-Cumulative Distribution 1)

Forward Rate

Go Forward Rate = Spot Exchange Rate*ln((Domestic Interest Rate-Foreign Interest Rate)*Time to Maturity)

Cumulative Distribution Two

Go Cumulative Distribution 2 = Cumulative Distribution 1-Volatile Underlying Stock*sqrt(Time to Expiration of Stock)

Position Size in Forex

Go Position Size in Forex = (Account Equity*Risk Percentage in Forex)/(Stop Loss in Pips*Pip Value in Forex)

Profit for Call Buyer

Go Profit for Call Buyer = max(0,Price of Underlying at Expiration-Exercise Price)-Call Premium

Interest Rate Parity

Go Forward Rate Constant = Spot Exchange Rate*((1+Interest Rate of Quote Currency)/(1+Interest Rate of Base Currency))

Gordon Growth Model

Go Current Stock Price = (Dividend Per Share)/(Required Rate of Return-Constant Growth Rate of Dividend)

Payoff for Call Buyer

Go Payoff for Call Buyer = max(0,Price of Underlying at Expiration-Exercise Price)

Purchasing Power Parity Theory using Inflation

Go Exchange Rate Factor = ((1+Inflation in Home Country)/(1+Inflation in Foreign Country))-1

Intrinsic Value

Go Intrinsic Value = Share Price-Base Value

Interest Rate Parity Formula

Forward Rate Constant = Spot Exchange Rate*((1+Interest Rate of Quote Currency)/(1+Interest Rate of Base Currency))
k_f = Sp*((1+I_Q)/(1+I_B))

What is Interest Rate Parity?

IRP is the fundamental equation that governs the relationship between interest rates and currency exchange rates. The basic premise of IRP is that hedged returns from investing in different currencies should be the same, regardless of their interest rates.

IRP is the concept of no-arbitrage in the foreign exchange markets (the simultaneous purchase and sale of an asset to profit from a difference in the price). Investors cannot lock in the current exchange rate in one currency for a lower price and then purchase another currency from a country offering a higher interest rate.

How to Calculate Interest Rate Parity?

Interest Rate Parity calculator uses Forward Rate Constant = Spot Exchange Rate*((1+Interest Rate of Quote Currency)/(1+Interest Rate of Base Currency)) to calculate 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 calculate Interest Rate Parity using this online calculator? To use this online calculator 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. Here is how the Interest Rate Parity calculation can be explained with given input values -> 27.25191 = 21*((1+16)/(1+12.1)).

FAQ

What is Interest Rate Parity?

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 and is represented as k_f = Sp*((1+I_Q)/(1+I_B)) or Forward Rate Constant = Spot Exchange Rate*((1+Interest Rate of Quote Currency)/(1+Interest Rate of Base Currency)). Spot Exchange Rate is the current amount one currency will trade for another currency at a specific point in time, Interest Rate of Quote Currency is the interest rate set by the central bank that issues the quote 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.

How to calculate Interest Rate Parity?

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 is calculated using Forward Rate Constant = Spot Exchange Rate*((1+Interest Rate of Quote Currency)/(1+Interest Rate of Base Currency)). To calculate Interest Rate Parity, you need Spot Exchange Rate (Sp), Interest Rate of Quote Currency (I_Q) & Interest Rate of Base Currency (I_B). With our tool, you need to enter the respective value for Spot Exchange Rate, Interest Rate of Quote Currency & Interest Rate of Base Currency and hit the calculate button. You can also select the units (if any) for Input(s) and the Output as well.

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