Interest rate parity (IRP) states that the foreign currency's forward rate premium or discount is roughly equal to the interest rate differential between the U.S. and the foreign country.

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Interest rate parity (IRP) is a theory that suggests that the difference between the forward exchange rate and the spot exchange rate of two currencies should be equal to the difference between their respective interest rates. This theory assumes that there are no restrictions on capital flows and that transaction costs and risks are the same for both currencies. Therefore, in general, if the interest rate differential between the U.S. and the foreign country increases, the foreign currency's forward rate should decrease to compensate for the higher interest rate. Similarly, if the interest rate differential decreases, the foreign currency's forward rate should increase to reflect the lower interest rate. This relationship is known as the interest rate parity condition.

Interest Rate Parity (IRP) States That the Foreign Currency's Forward