Forward rate parity

The claim that the forward exchange rate is an unbiased forecast of the future spot rate. It holds only if covered and uncovered interest parity both hold.

Where you will meet it

Forward rate parity appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Explain the international parity conditions, namely interest rate parity in its covered and uncovered forms, the international Fisher effect, purchasing power parity and forward rate parity
  CFA Level II · Economics

  “Forward rate parity says the forward rate is an unbiased forecast of the future spot.”

• Set out how the international parity conditions link to one another
  CFA Level II · Economics

  “Covered parity ties the forward premium to the interest differential; if uncovered parity also holds, the expected spot change equals that differential too, so the forward rate is an unbiased forecast: forward rate parity.”

See also

Spot rate · Uncovered interest parity

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with F · Glossary