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.

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interest rate option domestic rate