Interest rate parity

The interrelationship between interest rates, spot rates and foreign exchange rates in the currency markets. Interest rate parity is an economic theory that says that the difference between interest rates in two countries is the same as the difference between the spot exchange rate and the forward exchange rate of their currencies. This means that an investor should be able to make two fixed investments in two different currencies and receive identical returns even if the interest rates were different in the two countries. However, this is not always the case and as such arbitrage opportunities exist.

This definition is for general information purposes only