Definitions for **"Interest rate parity"**

The theory that differences in different currencies interest rates should equal the difference between the spot the forward exchange rates.... more on: Interest rate parity

The condition under which similar financial assets have the same interest rate when measured in the same currency.

occurs when interest rates in different nations are the same once adjusted for exchange-rate changes

Equal interest ratesâ€”a situation in which the interest rate in one currency equals the interest rate in another currency when exchange rate changes are taken into account. (p. 524)

A situation in which interest rates are equal across all countries once differences in risk are taken into account.

An alignment of a sequence of short-term interest rates such that the return realized by rolling over the short-term investments equals the return of the equivalent long-term investment.

The equality of rate of return on assets, independent of the currency in which they are denominated.

An arbitrage condition that must hold between the spot interest rates of different currencies. repurchase agreement An agreement to sell and subsequently repurchase a security.

The formal theory of interest rate parity holds that under normal conditions the forward premium or discount on a currency in terms of another is directly related to the interest differential between the two countries. For example, the forward rate discount (or premium) on Swiss francs in terms of dollars would equal the premium (or discount) of interest rates in Switzerland over (or under) those in the U.S. This theory holds only when there are unrestricted flows of international short-term capital. In reality, numerous economic and legal obstacles restrict the movement, so that actual parity is rare. See Interest Arbitrage.

Interest rate parity is a situation in which the returns on assets in different currencies are equal, provided there are no arbitrage opportunities..

A foreign exchange pricing theory which postulates that interest rate differentials between countries determine whether their currencies trade at parity, discount or premium in the forward market compared to the spot market.

A theory that the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate.

Traditional theory of foreign exchange which states that the forward premium or discount on one currency relative to another is directly related to the interest rate differential between the two countries. Because capital controls, restraints to trade, and national economic policy may affect any or all of the variables, actual realization of the theory may be difficult.

A relationship which must hold between the interest rates of two countries.

The interest rate parity is the basic identity that relates interest rates and exchange rates. The identity is theoretical, and usually follows from assumptions imposed in economics models. There is evidence that supports as well as rejects interest rate parity.