what is covered interest rate parity 
covered interest rate parity refers to a theoretical condition in which the relationship between interest rates and the spot and forward currency values of two countries are in equilibrium the covered interest rate parity situation means there is no opportunity for arbitrage using forward contracts which often exists between countries with different interest rates covered interest rate parity cip can be compared with uncovered interest rate parity uip formula for covered interest rate paritythe formula for cirp is most commonly expressed as follows to determine the forward foreign exchange rate 1f s 1 id 1 if where f the forward foreign exchange rates the current spot exchange rateid the interest rate in the domestic currency or the base currencyif the interest rate in the foreign currency or the quoted currency begin aligned f s times frac 1 i d 1 i f textbf where f text the forward foreign exchange rate s text the current spot exchange rate i d text the interest rate in the domestic currency qquad text or the base currency i f text the interest rate in the foreign currency qquad text or the quoted currency end aligned f s 1 if 1 id where f the forward foreign exchange rates the current spot exchange rateid the interest rate in the domestic currency or the base currencyif the interest rate in the foreign currency or the quoted currency under normal circumstances a currency that offers lower interest rates tends to trade at a forward foreign exchange rate premium in relation to another currency offering higher interest rates there are several different ways to calculate the forward foreign exchange rate but the most common method is used here 