Interest Rate Parity

Interest Rate Parity attempts to explain the difference between forward and spot rates as explained by differences in nominal interest rates and efficient markets will eliminate covered interest rate arbitrage opportunities.

FX/Y = SX/Y ((1+rX)/(1+rY))

  • The annualized forward premium can be approximated by the difference in the two interest rates.
  • When the domestic country (X) has a higher interest rate, it should sell at a forward discount as the currency is expected to depreciate; this indicates weakness.
  • When the relationship between the forward and the spot rate in the formula above does not hold, an arbitrage opportunity exists.  This is called covered interest rate arbitrage because the trader’s exchange rate risk is covered by the price secured in the forward contract.

Data Science in Finance: 9-Book Bundle

Data Science in Finance Book Bundle

Master R and Python for financial data science with our comprehensive bundle of 9 ebooks.

What's Included:

  • Getting Started with R
  • R Programming for Data Science
  • Data Visualization with R
  • Financial Time Series Analysis with R
  • Quantitative Trading Strategies with R
  • Derivatives with R
  • Credit Risk Modelling With R
  • Python for Data Science
  • Machine Learning in Finance using Python

Each book includes PDFs, explanations, instructions, data files, and R code for all examples.

Get the Bundle for $29 (Regular $57)
JOIN 30,000 DATA PROFESSIONALS

Free Guides - Getting Started with R and Python

Enter your name and email address below and we will email you the guides for R programming and Python.

Data Science in Finance: 9-Book Bundle

Data Science in Finance Book Bundle

Master R and Python for financial data science with our comprehensive bundle of 9 ebooks.

What's Included:

  • Getting Started with R
  • R Programming for Data Science
  • Data Visualization with R
  • Financial Time Series Analysis with R
  • Quantitative Trading Strategies with R
  • Derivatives with R
  • Credit Risk Modelling With R
  • Python for Data Science
  • Machine Learning in Finance using Python

Each book comes with PDFs, detailed explanations, step-by-step instructions, data files, and complete downloadable R code for all examples.