Description
Return spot×domestic growth/foreign growth and observed forward minus parity forward.
A financial model connects supplied rates, discount factors, cashflows or prices under a particular convention. A local identity or residual is not a complete valuation, an observed market relationship or a promise of future returns.
Return spot×domestic growth/foreign growth and observed forward minus parity forward.
When to use this tool
Use Fx Covered Interest Parity Gap when you need one transparent financial-model term.
How to use the tool and how it works
- Enter spotDomesticPerForeign, forwardDomesticPerForeign, domesticRate, foreignRate, years. Use the units and conventions below.
- Run the tool. Correct any format, range, or cross-field input error before interpreting the output.
- Read parityForward, forwardGap. Use the output convention below.
Require positive domestic-per-foreign spot/forward and nonnegative years, with positive simple-interest growth factors. Return spot×domestic growth/foreign growth and observed forward minus parity forward.1
| Input field | Meaning and units | Accepted input |
|---|---|---|
| spotDomesticPerForeign | Domestic-currency units per foreign unit at spot. | Required. Finite number; strictly above 0. |
| forwardDomesticPerForeign | Forward Domestic Per Foreign | Required. Finite number; strictly above 0. |
| domesticRate | Annual simple rate fraction, not an effective or continuous rate. | Required. Finite number. |
| foreignRate | Foreign Rate | Required. Finite number. |
| years | Years | Required. Finite number; minimum 0. |
| Output field | Interpretation | Returned shape |
|---|---|---|
| parityForward | Parity Forward | Required. Finite number. |
| forwardGap | Forward Gap | Required. Finite number. |
{
"input": {
"spotDomesticPerForeign": 1.2,
"forwardDomesticPerForeign": 1.25,
"domesticRate": 0.05,
"foreignRate": 0,
"years": 1
},
"output": {
"parityForward": 1.26,
"forwardGap": -0.010000000000000009
}
}Limitations and assumptions
- Rates are annual fractions with simple prorating, not effective compounding. This textbook covered-parity comparison omits basis, collateral, transaction costs and execution constraints.
- Inputs must satisfy both the field types and the cross-field conditions above. Invalid input causes an error; a successful false flag or documented placeholder is a different result.
- Numeric calculations use binary floating point unless exact decimal-integer arithmetic is explicitly stated. No hidden measurement tolerance or decimal rounding is added; nonfinite or out-of-contract results are rejected. Numeric signed-zero results are exported as zero.
Alternative or Complementary methods
Use a complete model matching the instrument, cashflows and market conventions. Review compounding, timing, currency, uncertainty and omitted costs before using a local estimate in a financial decision.
References
Similar or alternative tools
- Currency Hedged Return One Forward Term
Convert foreign wealth using spotEnd/spotStart and add hedgeFraction×(forward-spotEnd)/spotStart.
- Return Quote Currency Factor
Multiply them and subtract one for simpleReturn.