Interest rate parity
The theory of interest rate parity assists in describing the relationship between the overseas exchange rate and the interest rate. As per the theory of the interest rates parity, the dissimilarity in the interest rates of the nation for the financial securities and the derivatives of same risk and the maturities should be equivalentto forward rate discount or the premium for overseas currency. This signifies that when a saver is selecting between a domestic and foreign market, returns would be nearly equivalent, provided that the danger and the maturities of securities are same. This signifies that the dissimilarity in the interest rate of nation helps in setting the forward rates at which the financial securities are established.