Covered interest parity

How it is used

Abbreviated CIP; practical funding costs and constraints can produce departures from the theoretical relationship.

Example sentences

1. The analyst compared the quoted forward rate with covered interest parity.

   Interest differentials provide a theoretical benchmark for forward pricing.

2. Balance-sheet constraints helped explain the deviation from covered interest parity.

   Constraints can prevent traders from eliminating a pricing difference.

Common collocations

• covered interest parity condition
• deviation from covered interest parity

Related terms

• forward contractAn agreement to buy or sell an amount of currency or another asset on a future date at a price fixed today.
• exchange rateThe price of one currency in terms of another, for example how many Turkish lira you need to buy one euro.

More terms: Interest & Exchange Rates

• interest rate
• fixed rate
• variable rate
• APR
• foreign exchange
• compound interest
• maturity
• basis point
• policy rate
• inflation
• spread
• accrue