FX Forward & Covered Interest Parity Calculator
Compute the no-arbitrage FX forward rate, cross-currency basis, and hedge-adjusted foreign return from covered interest parity. Size the funding cost instantly.
Cross-Border Forex Liquidity
A clear path from inputs to results.
Compute the no-arbitrage forward exchange rate from two interest rates and the cross-currency basis, and see what covered interest parity (CIP) implies for a hedged cross-border investment. It reports the forward rate, the implied basis, the hedge-adjusted foreign return, and a liquidity-cost proxy, for FX and rates practitioners and finance students.
How to use
- Enter the spot exchange rate S (units of domestic currency per unit of foreign currency).
- Enter the domestic interest rate r_d and the foreign interest rate r_f for the tenor you are pricing.
- Enter the cross-currency basis b — the deviation from textbook covered interest parity observed in FX swap markets (often slightly negative for currencies funded against the US dollar).
- Set the tenor T in years and the notional amount you intend to hedge.
- Read the CIP-implied forward F = S*exp((r_d - r_f - b)T), the basis recovered from that forward, and the hedge-adjusted foreign return.
- Use the liquidity-cost proxy |b|*notional*T to gauge the funding cost or pickup the basis represents on your position.
The formula
Reference: Covered interest rate parity (continuous-compounding form); Du, Tepper & Verdelhan (2018), "Deviations from Covered Interest Rate Parity," Journal of Finance 73(3), 915-957; BIS Quarterly Review on the cross-currency basis.
Worked example
One-year forward with a negative cross-currency basis
- Spot S = 1.10; domestic rate r_d = 4.5%; foreign rate r_f = 2.0%; cross-currency basis b = -0.6%; tenor T = 1 year; notional = 1,000,000.
- 1
The CIP-implied forward is F = 1.10*exp((0.045 - 0.02 - (-0.006))*1) = 1.10*exp(0.031) = 1.134634, so the foreign currency trades at a forward premium. Inverting, the basis recovered from the forward is r_d - r_f - ln(F/S)/T = 0.045 - 0.02 - 0.031 = -0.006, i.e. -0.60%, matching the input. The hedge-adjusted foreign return is r_f + ln(F/S)/T = 0.02 + 0.031 = 0.051, or 5.10% - that is what a domestic investor earns by converting, investing abroad, and hedging the currency back. The liquidity-cost proxy is |b|*notional*T = 0.006*1,000,000*1 = 6,000.
A 1-year forward rate of 1.134634, a recovered basis of -0.60%, a hedge-adjusted foreign return of 5.10% (0.60% above the 4.5% domestic rate), and a 6,000 liquidity-cost proxy on the 1,000,000 notional.
Interpreting the result
Under perfect covered interest parity the basis b is zero and a currency-hedged foreign investment earns exactly the domestic rate. A non-zero basis is the measured deviation: here b = -0.6% means hedging into the foreign currency and back actually yields 0.6% more than the domestic rate (5.10% versus 4.5%), a pickup that compensates for the scarcity of one currency's funding in the FX swap market. The sign convention matters - a negative basis widens the forward premium of the foreign currency. The liquidity-cost proxy annualizes the basis over your notional to size that funding effect in money terms.
Assumptions & limitations
- Rates are continuously compounded and constant over the tenor; converting to money-market or bond conventions requires your own day-count adjustment.
- The forward is the CIP-implied no-arbitrage rate given your inputs, not a live quoted forward, so it only matches the market if your rates and basis match the market.
- The basis is taken as a single input for the chosen tenor; in reality it varies by tenor, counterparty, and collateral terms.
- Credit risk, bid-ask spreads, collateral/margin costs, and transaction costs are not modeled; the liquidity-cost figure is a simple |b|*notional*T proxy, not an executable cost.
- The tool prices a hedged position; it says nothing about the unhedged return, which also depends on the realized spot move.
Frequently asked questions
What is covered interest rate parity?
Covered interest parity says the forward exchange rate must offset the interest-rate difference between two currencies, so that borrowing in one currency and lending in the other with the FX risk hedged earns no riskless profit. In continuous form, F = S*exp((r_d - r_f)*T) when there is no basis. The "covered" part refers to locking in the forward rate today.
What does the hedge-adjusted foreign return tell me?
It is the return a domestic investor actually earns by converting to the foreign currency, investing at r_f, and hedging the proceeds back with a forward. If CIP held exactly it would equal the domestic rate; the gap between it and r_d is exactly the (negated) basis. Here it is 5.10% versus a 4.5% domestic rate, a 0.6% pickup.
Why would the forward show a premium or discount?
The currency with the lower interest rate (adjusted for the basis) trades at a forward premium, and the higher-rate currency at a forward discount, so that hedged returns are equalized. With r_d = 4.5% above r_f = 2.0% and a negative basis, the foreign currency here trades at a forward premium (F = 1.1346 above the 1.10 spot).
What is the cross-currency basis?
The basis b is the empirical deviation from covered interest parity: the extra spread needed to make the hedged borrowing-and-lending trade break even. Since the 2008 crisis it has persistently differed from zero because of regulation, balance-sheet costs, and dollar-funding demand. A non-zero basis is widely read as an FX funding or liquidity premium.
Is this a currency converter for everyday use?
No. It is a rates and FX tool that computes forward exchange rates and covered-interest-parity relationships, not live retail conversion rates. For a plain spot conversion you would just multiply by the current market rate; this calculator is about forward pricing and the funding economics behind it.
How should I read the liquidity-cost proxy?
It is |b|*notional*T, the annualized basis applied to your position size - a rough dollar measure of what the parity deviation is worth to you over the tenor. On a 1,000,000 notional at a 0.6% basis for one year that is 6,000. It is an order-of-magnitude figure, not an executable cost, since it ignores spreads and collateral.
Methodology last reviewed 2026-10-06. Results are informational and not financial or engineering advice — see our disclaimer.