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Interest Rate Parity Interest rate parity states that the forward rate premium (or discount) of a currency should reflect the differential in interest rates between the two countries. The discounted interest rates differential equals the percentage forward discount. The spot rate is the present value of the forward rate. The interest rate is a bridge. Interest rate parity is equivalent to the statement that one unit of foreign currency, deliverable on a particular future date, must cost the same amount independently of whether it is obtained through the forward market or by means of the spot market. The difference in the spot and forward rates for currencies are due solely to differentials in interest rates. Covered Interest Arbitrage A simple currency swap in which the counterparties exchange currencies at both the spot and forward rates simultaneously. The forward swap restores currency exposures to the original position without a currency gain or...

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