Everyday interest rate parity problems come down to one relationship between annualised base currency interest rate, annualised price currency interest rate, number of days in the forward contract and spot price. This calculator turns those numbers into currency forward price, price currency interest rate and base currency interest rate, with the working shown so you can check the result rather than simply trust it.
What Is the Interest Rate Parity Calculator?
The interest rate parity calculator takes annualised base currency interest rate, annualised price currency interest rate, number of days in the forward contract and spot price and turns them into currency forward price, price currency interest rate and base currency interest rate.
It is the kind of calculation you would otherwise do on the back of an envelope: mechanical, repeatable and easy to get subtly wrong without noticing.
How the Interest Rate Parity Figure Is Built
Each result is calculated from the ones before it, so the working is fully visible. That matters when the answer is going to be quoted to somebody else and you need to be able to explain where it came from.
The figures are exactly as good as the assumptions underneath them. Check the rates, the periods and the tax treatment before you rely on the result.
Reading the Result Sensibly
A small change in an input can move the result by much more than you would expect, particularly where the calculation divides by one of the figures you supplied. That is worth understanding before you rely on a figure.
For anything that will be committed to, write the inputs down beside the result. A number you can reproduce is worth far more than one you cannot explain.
A Worked Example
Working through an example, with annualised base currency interest rate set to 10, annualised price currency interest rate set to 5, number of days in the forward contract set to 2, the calculator returns price currency interest rate of 0.03, and base currency interest rate of 0.06, and currency forward price of 97.37. Substitute your own figures and the same steps produce the same kind of answer.
Frequently Asked Questions
What do I need to work out currency forward price?
Enter annualised base currency interest rate, annualised price currency interest rate, number of days in the forward contract and spot price. The calculator then works through the relationship and reports currency forward price, price currency interest rate and base currency interest rate.
What does the interest rate parity actually calculate?
It takes annualised base currency interest rate, annualised price currency interest rate, number of days in the forward contract and spot price and converts them into currency forward price, price currency interest rate and base currency interest rate using the standard relationship for this problem. Each step is applied in turn, so every output is traceable back to the numbers you typed in.
How should I enter annualised base currency interest rate?
Use the value you actually have, in the unit shown next to the field. Enter every value in the same unit system. The calculator assumes the figures you supply are consistent, so it cannot correct a mistake that happens before the calculation starts.
Can I use this for a quick estimate as well as a precise answer?
Yes. The calculator is built for quick checks, so round your inputs to a sensible number of significant figures and the result will be just as useful. If you need more precision, keep the same method and add digits to the inputs rather than adjusting the method itself.
Why does a small change in one value move the answer so much?
That happens when an output depends on a ratio, because dividing by a small number magnifies any change in it. Check the units first, then check whether the value you entered is in the range the relationship was designed for.