βοΈ Interest Rate Parity Calculator
Fair forward vs market quote.
Fair forward rate (covered IRP)
Estimates for planning only, not financial advice.
Covered interest rate parity says the forward rate must equal spot scaled by the interest differential; anything else is free money. With spot at 1.0800, domestic 4.50%, foreign 2.00%, and 90 days, the fair forward is 1.0867. A market quote of 1.0900 sits 0.30% rich to fair, a gap an arbitrageur would sell.
How to Use This Calculator
Enter spot, both interest rates, and the tenor to get the fair forward, then enter the market's forward quote to see the mispricing in percent.
Enter spot and the two interest rates for the tenor.
Enter the days and the market forward quote you want to test.
Read the fair forward and the mispricing. For the premium in annualized terms, see our forward premium calculator.
The Parity Formula
Covered parity is enforced by a concrete trade: borrow domestic currency, convert at spot, invest at the foreign rate, and lock the return with a forward sale. If the market forward exceeds fair, reverse the trade. Because the arbitrage is mechanical, deviations in free markets are measured in fractions of a pip and vanish in seconds. Uncovered parity, which claims the expected spot change equals the rate differential, is a different and far shakier proposition.
Worked Example
Spot 1.0800, domestic 4.50%, foreign 2.00%, 90 days: fair forward = 1.0867. Market quotes 1.0900. Mispricing = (1.09 - 1.0867) / 1.0867 = +0.30%. The arbitrage: borrow dollars at 4.5%, buy euros spot, invest at 2%, sell euros forward at 1.09. The round trip locks roughly 0.30% annualized over 90 days before costs. In practice, bid-ask spreads and balance-sheet charges eat most of that, which is why the gap can sit there teasing anyone without a prime-brokerage stack.
Covered vs Uncovered Parity
Covered parity is arithmetic and holds tightly; uncovered parity is a hypothesis about expectations and fails routinely, which is the famous forward premium puzzle: high-yield currencies tend to appreciate rather than depreciate as parity predicts, making the carry trade profitable on average. Do not confuse the two. This calculator tests the covered version, the one you can trade, not the uncovered one, which is the one academics argue about.
My warning: if you think you found a parity violation on a major pair, check your inputs three times. Wrong day-count, stale rates, or mismatched value dates explain nearly every retail "arbitrage." The real persistent gaps live in constrained markets, and harvesting them needs institutional plumbing.
Estimates for planning only, not financial advice.
Frequently Asked Questions
What is interest rate parity?
The principle linking spot rates, forward rates, and interest differentials. Covered parity gives the no-arbitrage forward price and holds tightly; uncovered parity links expected spot moves to rate gaps and holds poorly.
How do you test covered interest parity?
Compute the fair forward from spot and the two rates, then compare the market quote. Gaps beyond transaction costs signal arbitrage: borrow one side, invest the other, hedge with the forward.
What is the carry trade?
Borrowing in a low-rate currency to invest in a high-rate one, profiting when uncovered parity fails and the high-yielder does not depreciate as predicted. Profitable on average, brutal in crises when everyone exits together.
Why does uncovered parity fail?
Risk premia, peso problems, and central bank behavior all distort expectations. The forward premium puzzle, high-rate currencies appreciating, has survived decades of research and keeps the carry trade alive.
What is the cross-currency basis?
The deviation from covered parity in the cross-currency swap market, persistent since 2008. It shows dollar funding stress and balance-sheet costs that textbook arbitrage assumes away.
Do capital controls break parity?
Yes. Where money cannot move freely, the arbitrage trade cannot execute and gaps persist. Offshore versus onshore forwards in controlled currencies routinely diverge from parity-implied levels.
Which rates go into the formula?
Money-market rates for the exact tenor: LIBOR successors like SOFR and ESTR, or interbank deposit rates. Mismatched tenors are the most common source of phantom mispricing.
Can individuals arbitrage parity gaps?
Essentially no on majors: the gaps are sub-pip and need institutional funding and execution. Retail edges, if any, live in exotic pairs with wide spreads that usually erase the gap.
Does parity hold during crises?
Loosely at best. In 2008 and 2020, dollar funding stress blew cross-currency bases wide as balance-sheet constraints blocked arbitrage. Textbook parity assumes frictionless markets, and crises are friction.
What is triangular arbitrage?
Exploiting mispricing among three currency pairs, like EUR/USD, USD/JPY, and EUR/JPY, which must be mutually consistent. Algorithms close these gaps in milliseconds; it is not a human-timescale trade.
Why do forward points change without spot moving?
Because interest rate expectations moved. A repriced rate hike in either country shifts the forward via the parity formula while spot sits still, which is why forwards twitch around central bank meetings.