what is uncovered interest rate parity uip 
uncovered interest rate parity uip theory states that the difference in interest rates between two countries will equal the relative change in currency foreign exchange rates over the same period it is one form of interest rate parity irp used alongside covered interest rate parity if the uncovered interest rate parity relationship does not hold then there is an opportunity to make a risk free profit using currency arbitrage or forex arbitrage the formula for uncovered interest rate parity is f 0 s 0 1 i c 1 i b where f 0 forward rate s 0 spot rate i c interest rate in country c i b interest rate in country b begin aligned f 0 s 0 frac 1 i c 1 i b textbf where f 0 text forward rate s 0 text spot rate i c text interest rate in country c i b text interest rate in country b end aligned f0 s0 1 ib 1 ic where f0 forward rates0 spot rateic interest rate in country cib interest rate in country b uncovered interest rate parity is based on the theory that countries with high interest rates tend to have currencies that often depreciate this is calculated through the formula above which takes the spot exchange rate between the two currencies and multiplies this by the interest rate in one country divided by the interest rate in the second country in theory the expected spot exchange rate will be equal to the gap between the two countries interest rates however if this does not materialize investors can make a profit through taking a loan in a low interest rate currency and using it to purchase a high interest rate currency a currency with a lower interest rate will trade at a forward premium in relation to a currency with a higher interest rate for example the u s dollar typically trades at a forward premium against the canadian dollar conversely the canadian dollar trades at a forward discount versus the u s dollar 