It is theory in which interest rate disparity among the two countries is equivalent to the differential between spot exchange rate and forward exchange rate. The interest rate parity shows a significant role in foreign exchange market, involving foreign exchange rate, spot exchange rate and interest rates.
The interest rate parity is important calculation that manages the relation between currency exchange rate and interest rates. The basic principle of interest rate parity is that yield from investment in different currencies should be the unchanged regardless of level of their interest rate. The interest rate parity is mostly used by the forex traders to find the arbitrage opportunities.