interest rate parity
Definition
Relationship between the currency exchange rates of two nations and their local interest rates, and the essential role that it plays in foreign exchange markets. According to this concept, the difference between the market interest rates in any two countries is about the same as the difference between the forward and the spot exchange rates of their respective currencies. Therefore no arbitrage opportunity in the mutual trading of their currencies can exist unless this parity breaks down. In practice however, due to the government interference via currency controls, the full realization of this parity might not occur.
Use this term in a sentence
“ You should try to make sure that you understand how any interest rate parity may affect your intent to borrow. ”
“ The interest rate parity between the USA and Mexico is relatively low according to what my mom explained to me earlier. ”
“ The interest rate parity had to be figured out by our best and most intelligent team members and would take a long time. ”
