Calculator Inputs
Formula Used
For domestic currency per foreign currency:
E[S_T] = S_0 × G_d ÷ G_f
For foreign currency per domestic currency:
E[S_T] = S_0 × G_f ÷ G_d
G_d is the domestic growth factor. G_f is the foreign growth factor.
The parity gap is:
Parity Gap = Forecast Future Spot - UIP Implied Future Spot
The gap percentage is:
Gap % = Parity Gap ÷ UIP Implied Future Spot × 100
How To Use This Calculator
- Enter the current spot exchange rate.
- Select the quote direction used by that exchange rate.
- Enter the domestic and foreign annual interest rates.
- Choose the time horizon and compounding method.
- Add your expected future spot rate if you have one.
- Press the calculate button to view parity results.
- Use CSV or PDF export for records and reports.
Example Data Table
| Scenario | Spot Rate | Domestic Rate | Foreign Rate | Horizon | Quote | Expected Spot |
|---|---|---|---|---|---|---|
| USD base review | 1.2500 | 5.00% | 3.00% | 1 year | Domestic per foreign | 1.2800 |
| Short carry test | 0.9150 | 4.25% | 5.10% | 6 months | Domestic per foreign | 0.9100 |
| Inverse quote check | 145.5000 | 2.00% | 0.50% | 90 days | Foreign per domestic | 145.1000 |
Understanding Uncovered Interest Rate Parity
Uncovered interest rate parity explains how interest rates and exchange rate expectations connect. It says investors should not earn a predictable extra return by moving money between two currencies without hedging exchange risk. A higher domestic interest rate should be balanced by expected domestic currency depreciation. A lower domestic rate should be balanced by expected appreciation.
Why This Calculator Matters
Currency decisions often look simple when only rates are compared. Yet the expected exchange rate can change the entire return. This calculator joins the spot rate, domestic rate, foreign rate, and holding period. It estimates the future spot rate implied by parity. It also compares that rate with your own forecast. The difference becomes a parity gap. That gap helps users judge whether a view is aggressive, conservative, or close to theory.
Key Inputs To Review
The spot rate should match the quote direction. If the quote is domestic currency per foreign currency, keep that same direction for the expected future rate. Rates should use annual percentages. The time horizon can be entered in years, months, or days. Compounding choice also matters. Simple compounding works for rough short periods. Annual compounding suits standard quoted returns. Continuous compounding is useful in advanced finance models.
How To Read Results
The implied future spot rate is the exchange rate that makes expected domestic and foreign returns equal. The expected currency move shows appreciation or depreciation under the chosen quote. A positive parity gap means your forecasted future spot is above the parity estimate. A negative gap means it is below. The calculator also shows basis points, annualized differences, and return comparisons, so decisions are easier to explain.
Practical Use Cases
Analysts can test currency forecasts before writing reports. Students can check textbook problems quickly. Treasurers can compare interest rate assumptions across markets. Investors can see how much exchange movement is needed to offset yield differences. The tool does not remove risk. It organizes assumptions. Better inputs produce better interpretation.
Use the export buttons after calculating. The CSV file supports spreadsheet review. The PDF gives a compact record for sharing. Always document the rate source, quote direction, and date used for each assumption before presenting results to decision makers.
FAQs
What is uncovered interest rate parity?
It is a finance relationship linking interest rate differences with expected exchange rate changes. It assumes investors should not expect a sure extra return from unhedged currency switching.
Why is it called uncovered?
It is called uncovered because the currency exposure is not hedged with a forward contract. The investor remains exposed to the future spot exchange rate.
Which spot rate should I enter?
Enter the current market spot rate using one quote direction. Then keep the same direction for any expected future spot rate you enter.
What does a positive parity gap mean?
A positive gap means your forecasted future spot rate is above the calculator’s parity-implied rate. The meaning depends on the selected quote direction.
Can rates be negative?
Yes. The calculator accepts negative interest rates. Some discrete compounding cases may fail if the rate creates an invalid growth base.
Should I use simple or continuous compounding?
Use simple compounding for rough short-period estimates. Use continuous compounding for advanced models. Use annual or periodic compounding for quoted market rates.
Does this calculator predict actual exchange rates?
No. It shows the exchange rate implied by parity assumptions. Actual exchange rates may differ because of risk, policy, liquidity, and market expectations.
What are basis points in the result?
Basis points express the parity gap percentage more precisely. One percentage point equals 100 basis points.