Covered Interest Parity
Covered interest parity is the no-arbitrage condition equating domestic returns with foreign returns hedged through an FX forward.
Interest-rate parity concepts connecting spot rates, forward rates, currency funding, and hedged returns.
FX parity relationships connect spot exchange rates, forward exchange rates, and comparable interest rates in two currencies. They are pricing and diagnostic frameworks, not promises that exchange rates will follow a formula or that every measured gap can be traded profitably.
Start with Interest Rate Parity for the umbrella comparison between covered and uncovered relationships. Use Covered Interest Parity when the question is how domestic investment compares with a foreign investment whose future currency proceeds are locked through a forward.
| Question | Start with |
|---|---|
| How do spot, forward, and interest rates relate? | Interest Rate Parity |
| What is the difference between covered and uncovered parity? | Interest Rate Parity |
| How are two hedged investment paths compared? | Covered Interest Parity |
| Why can cross-currency basis persist? | Covered Interest Parity |
Forward Points in Currency describes the quoted adjustment from spot to forward. Interest Rate Differential isolates the rate gap, while Foreign Exchange Swap shows the instrument commonly used for synthetic currency funding.
This section is for financial education only. It does not provide investment, trading, tax, legal, accounting, funding, hedging, or arbitrage advice.
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Covered interest parity is the no-arbitrage condition equating domestic returns with foreign returns hedged through an FX forward.
Interest rate parity links spot and forward exchange rates with comparable interest rates in two currencies.