Covered Interest Rate Parity

Covered Interest Rate Parity

The principle that the yields from interest-bearing foreign and domestic investments should be equal when the currency market is used to predetermine the domestic currency payoff from a foreign investment. For example, suppose interest on 90 U.K. Treasury bills is 4% but only 1% in U.S. When the U.S. investor tries to take advantage of the higher yield, they translate U.S. dollars to Sterling to buy the Treasury bill and then sell 90-days forward Sterling (so they can translate the principal and interest back to U.S. dollars). Covered Interest Parity ensures that the return to this transaction is 1%. If it was different, there would be arbritrage.

Covered Interest Rate Parity

The principle stating that yields from two equivalent investments in the domestic market and the foreign market, respectively, are equal after accounting for fluctuations in the exchange rate. See also: Purchasing power parity, Covered interest rate arbitrage.
References in periodicals archive ?
the covered interest rate parity for the case in which a futures contract is entered into;
Regarding the covered interest rate parity, the theory holds pretty well, as a cvasi-consensus is present among economists.