Uncovered Interest Rate Parity - UIP


DEFINITION of 'Uncovered Interest Rate Parity - UIP'

A parity condition stating that the difference in interest rates between two countries is equal to the expected change in exchange rates between the countries' currencies. If this parity does not exist, there is an opportunity to make a profit.


Uncovered Interest Rate Parity (UIP)

"i1" represents the interest rate of country 1
"i2" represents the interest rate of country 2
"E(e)" represents the expected rate of change in the exchange rate


Loading the player...

BREAKING DOWN 'Uncovered Interest Rate Parity - UIP'

For example, assume that the interest rate in America is 10% and the interest rate in Canada is 15%. According to the uncovered interest rate parity, the Canadian dollar is expected to depreciate against the American dollar by approximately 5%. Put another way, to convince an investor to invest in Canada when its currency depreciates, the Canadian dollar interest rate would have to be about 5% higher than the American dollar interest rate.

  1. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  2. Uncovered Interest Arbitrage

    A form of arbitrage that involves switching from a domestic currency ...
  3. Parity

    1. In general, a situation of equality. Parity can occur in many ...
  4. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  5. Arbitrage

    The simultaneous purchase and sale of an asset in order to profit ...
  6. Interest Rate Parity

    A theory in which the interest rate differential between two ...
Related Articles
  1. Forex Education

    Explaining Uncovered Interest Rate Parity

    Uncovered interest rate parity is when the difference in interest rates between two nations is equal to the expected change in exchange rates.
  2. Options & Futures

    A Primer On The Forex Market

    Moving from equities to currencies requires you to adjust how you interpret quotes, margin, spreads and rollovers.
  3. Economics

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  4. Options & Futures

    Using Interest Rate Parity To Trade Forex

    Learn the basics of forward exchange rates and hedging strategies to understand interest rate parity.
  5. Options & Futures

    Getting Started In Forex

    Before entering this market, you should define what you need from your broker and from your strategy.
  6. Investing

    What a Family Tradition Taught Me About Investing

    We share some lessons from friends and family on saving money and planning for retirement.
  7. Investing Basics

    Why Interest Rates Affect Everyone

    Learn why interest rates are one of the most important economic variables and how every individual and business is affected by rate changes.
  8. Investing

    Where the Price is Right for Dividends

    There are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
  9. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  10. Personal Finance

    How Tech Can Help with 3 Behavioral Finance Biases

    Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
  1. How do you make money trading money?

    Investors can trade almost any currency in the world. Investors, as individuals, countries, and corporations, may trade in ... Read Full Answer >>
  2. What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
  3. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>
  4. Marginal propensity to Consume (MPC) Vs. Save (MPS)

    Historically, because people in the United States have shown a higher propensity to consume, this is likely the more important ... Read Full Answer >>
  5. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>
  6. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  2. Bullish Engulfing Pattern

    A chart pattern that forms when a small black candlestick is followed by a large white candlestick that completely eclipses ...
  3. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  4. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
Trading Center