What is interest rate parity between different currencies?
Interest rate parity derives from the notion that hedged returns from investing in different currencies should be the same regardless of their interest rates. In order to ensure that happens, exchange rate over time need to change to offset any benefits that a country with a higher interest rate offers to an investor.
The following formula represents the interest rate parity
F0 = S0 * (1 + id) / (1 + if) or F0 / S0 * (1 + if) = (1 + id)