Under interest rate parity, investors are indifferent between investing at home or abroad as far as expected return is concerned; any existing nominal risk-free interest rate disparity is offset by spot and forward exchange rate differentials. When interest rate parity exists, the following relationship is true: S0 (1 þ RFC)=F1 ¼ (1 þ RUS): The left-hand side of the equation reflects the return from converting dollars at the spot rate (S0), investing them at the foreign rate (1 þ RFC), and then converting the currency back into dollars at the forward rate (F1). The right-hand side reflects the return from investing the dollars in the US.