Interest Rate Parity Calculator — Covered IRP & Forward Exchange Rate
Enter the spot exchange rate and the risk-free interest rates for two countries to compute the no-arbitrage forward exchange rate using Covered Interest Rate Parity. The chart shows how the implied forward rate evolves as the time horizon extends.
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%
years
Forward rate that eliminates arbitrage under covered IRP
- 1
Domestic growth factor
(1 + 0.05)^1 = 1.05How much 1 unit grows at the domestic rate over the forward period. - 2
Foreign growth factor
(1 + 0.03)^1 = 1.03 - 3
Rate ratio
1.05 ÷ 1.03 = 1.0194 - 4
Theoretical forward rate (F)
1.1 × 1.0194 = 1.1214
How does this calculator work?
Covered IRP: F = S × (1 + r_d)^T / (1 + r_f)^T. Enter spot rate, both countries' interest rates and the time horizon to find the no-arbitrage forward rate. If r_d > r_f, domestic currency trades at a forward discount (F > S); if r_d < r_f, it trades at a premium. Deviations from the formula represent arbitrage opportunities.
Formula
How this is calculated
Interest Rate Parity (IRP) is a fundamental no-arbitrage condition in foreign exchange markets. It states that the return from investing one unit of domestic currency domestically must equal the return from converting it to foreign currency, investing abroad at the foreign rate, and converting back via a forward contract — otherwise a risk-free profit (arbitrage) would exist and market forces would eliminate it.
The covered IRP formula is F = S × (1 + r_d)^T / (1 + r_f)^T, where S is the current spot rate (domestic per foreign), r_d and r_f are the domestic and foreign annual interest rates, T is the horizon in years, and F is the forward exchange rate. When r_d > r_f, the domestic currency trades at a forward discount (F > S) — it takes more domestic units to buy foreign currency forward — which exactly offsets the higher domestic return. When r_d < r_f, the domestic currency trades at a forward premium (F < S).
In practice, small deviations from IRP occur due to transaction costs, capital controls, counterparty risk and illiquidity in forward markets. Larger, persistent deviations signal either capital controls or significant credit risk. The approximation (rd − rf) × T for the forward premium is accurate when rates are small but overstates the premium for large rate differentials because it ignores compounding. This calculator uses exact discrete compounding throughout.
Frequently asked questions
Covered IRP uses an actual forward contract to lock in the exchange rate and eliminates currency risk entirely — it is a pure arbitrage condition that holds very tightly in liquid markets. Uncovered IRP is an expectation: the expected future spot rate equals the current forward rate. Uncovered IRP is an equilibrium condition but is often violated in practice because exchange rate expectations are not always accurate.
If the domestic rate is higher, investors globally would rush to lend there, driving up demand for domestic currency and appreciating it. The forward discount on the domestic currency exactly offsets the rate advantage, restoring parity and eliminating the arbitrage. In equilibrium you earn the same risk-adjusted return regardless of currency.
This calculator uses the direct quote convention: S and F represent domestic currency units per one unit of foreign currency. For example, if the domestic country is the US and the foreign currency is EUR, S = 1.10 means 1 EUR = 1.10 USD. A forward rate of F = 1.12 means the USD trades at a forward discount against EUR (USD weakens, consistent with USD having the higher interest rate).
Also known as
TG we-Calculate Editorial Team. (2026). Interest Rate Parity Calculator — Covered IRP & Forward Exchange Rate [Online calculator]. TG we-Calculate. https://we-calculate.com/calculator/interest-rate-parity-calculator
TG we-Calculate Editorial Team. "Interest Rate Parity Calculator — Covered IRP & Forward Exchange Rate." TG we-Calculate. 2026. https://we-calculate.com/calculator/interest-rate-parity-calculator.
TG we-Calculate Editorial Team, "Interest Rate Parity Calculator — Covered IRP & Forward Exchange Rate," TG we-Calculate, 2026. [Online]. Available: https://we-calculate.com/calculator/interest-rate-parity-calculator
@misc{wecalculate_interest_rate_parity_calculator, title = {Interest Rate Parity Calculator — Covered IRP & Forward Exchange Rate}, author = {{TG we-Calculate Editorial Team}}, howpublished = {\url{https://we-calculate.com/calculator/interest-rate-parity-calculator}}, year = {2026}, note = {TG we-Calculate} }
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