FX Parity Relationships

FX parity relationships connect spot exchange rates, forward exchange rates, and interest-rate differences across currencies. This branch helps readers understand when a forward price is being compared with rate differentials rather than interpreted as a simple forecast.

Use these pages when an explanation refers to Interest Rate Parity or Covered Interest Parity as the reason forward rates and money-market rates should line up in a particular way.

What This Branch Covers

Decision Lens

Start with the inputs: spot rate, forward rate or points, relevant interest rates, tenor, and transaction costs. Parity is most useful as a pricing relationship or diagnostic, not as proof that a practical trade opportunity exists.

Evaluation Checklist

• Confirm the currencies, tenor, spot rate, forward rate, and interest-rate sources.
• Check whether the discussion assumes covered hedging or an unhedged comparison.
• Include bid/ask spreads, funding constraints, credit limits, and settlement risk when moving from theory to practice.
• Use spot/forward pages when the question is about the instrument rather than the parity relationship.
• Keep the explanation educational; do not present parity gaps as actionable arbitrage advice.

Common Mistakes

• Ignoring transaction costs and balance-sheet constraints when discussing parity.
• Treating a forward premium or discount as a market forecast without checking rate differentials.
• Mixing covered and uncovered comparisons in the same conclusion.
• Using inconsistent tenors for deposits, borrowing rates, and forward contracts.

In this section

Choose a subsection first. Deeper term pages live inside each subsection, which keeps large topic hubs readable.