interest-rate parity theory

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An economic model associated with exchange-rate forecasting. The covered interest-rate parity theory identifies a relationship between the interest rates in two currencies and the spot and forward exchange rates (see covered interest-rate parity). The uncovered interest-rate parity theory substitutes the expected actual spot rate for the forward rate and provides an estimate of future currency movements and their relationship to interest rates in the different currencies. See forward dealing; spot currency market.

Subjects: Financial Institutions and Services.

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