How this calculator works
Interest rate parity ties exchange rates to interest rate differences. Covered parity uses a forward contract, so the comparison is risk-free: if the quoted forward differs from the parity rate, a trader can in theory borrow in one currency, convert at spot, lend in the other and lock in a profit. Uncovered parity replaces the contractual forward with the expected future spot rate and states that the higher-yielding currency should be expected to depreciate by the interest differential. The uncovered version is a theoretical benchmark, not an enforceable relationship, and the gap it measures is a currency risk premium or a forecast error rather than free money.
Formula
Parity forward = spot × (1 + i price × d/360) / (1 + i base × d/360). Parity gap = (quoted or expected rate - parity forward) / parity forward. Annualized forward premium = (quoted / spot - 1) × 360/d, and the annualized rate differential is i price - i base.
Worked example
Spot of 1.10, a 4.5% price-currency rate, a 3% base-currency rate and 90 days give a parity forward of about 1.10409. A quoted forward of 1.1080 is 0.354% above parity, and its annualized premium is about 2.909%.
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Frequently asked questions
Does a parity gap mean free profit?
In theory, a covered gap is an arbitrage. In practice transaction costs, bid-ask spreads, funding costs, credit limits and capital controls can exceed or block the apparent gain. Persistent gaps are studied as a sign of financial frictions.
Which rate do I enter for the base currency?
The base currency is the one the exchange rate is quoted per unit of. If the spot is 1.10 price-currency units per base unit, the base-currency interest rate is the rate on that base currency.
How is uncovered parity different?
Uncovered parity compares the expected future spot rate rather than a contracted forward. It is a forecast condition, so it can fail persistently without creating a risk-free trade.