Interest rate parity theorem


Also found in: Acronyms.

Interest rate parity theorem

Expression that the interest rate differential between two countries is equal to the difference between the forward foreign exchange rate and the spot rate.

Interest Rate Parity

A theory stating that the difference between interest rates in two countries is the difference between the foreign exchange rate and the spot rate of their two currencies. According to this theory, when one makes two fixed investments in two different currencies, the return on both investments are the same even though interest rates may be different in absolute terms. See also: Purchasing power parity.
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