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YouTube T3-21b: Interest rate parity: visual/mathematical

Nicole Seaman

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Interest rate parity (IRP) anticipates depreciation (appreciation) by the currency with the higher (lower) interest rate to maintain equilibrium (i.e., investor indifference). In equilibrium, 100*exp[r(b)*T]*F(0) = 100*S(0)*exp[r(q)*T] where r(b) is the base currency's interest rate and r(q) is the quote currency's interest rate. Solving for F(0) = S(0)*[exp(r(b)-r(q))*T]