Wondering how to calculate interest rate parity in Excel? According to interest rate parity, the difference between the forward exchange rate of two currencies and the spot exchange rate is equivalent to the difference between the two country's interest rates. To calculate interest rate parity in Excel, you must start with the proper formula. It is possible to approximate the calculation of a forward exchange rate between two currencies, if you have the current exchange rate and nominal interest rates of both currencies. The following steps can allow you to calculate interest rate parity in Excel.
To calculate interest rate parity in Excel, you will need:
- Microsoft Excel
- Current interest rates of two unique currencies
- The current spot exchange rate between the two currencies
- Set the spot exchange rate between a pair of currencies. To calculate interest rate parity in Excel, you must know the exchange rate between two currencies. This number reflects how many units of a second currency can be purchased in the first currency.
- Set the nominal risk-free interest rate for the first currency. The number should be reflected as a percentage, or as a decimal between zero and one.
- Set the nominal risk-free interest rate in the second currency. Also a percentage or a decimal between zero and one. Without the interest rates of two currencies, you will not be able to calculate interest rate parity in Excel.
- Insert the formula for forward exchange rate. To calculate interest rate parity in Excel in this example, the formula to approximate a forward exchange rate is F1*((1+F3)/(1+F2)), where F1 is the spot exchange rate, and F2 is the interest rate of the first currency and F3 is the interest rate of the second currency.
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