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What is covered interest rate parity in forex?

Covered Interest Rate Parity (CIRP) states that differences in interest rates between two countries are offset by forward exchange rates, eliminating arbitrage. For example, if US rates are higher than Japan’s, USD/JPY forward rates will adjust accordingly. CIRP explains why forward contracts exist and why risk-free arbitrage is rare. Traders use it to price forwards and assess deviations. When CIRP doesn’t hold, opportunities for arbitrage may arise, but in practice, transaction costs and liquidity constraints limit access. Understanding CIRP helps traders interpret forward pricing and interest rate dynamics, essential for hedging and carry trades