How Does the Concept of ‘Interest Rate Parity’ Relate to Derivatives?

Interest rate parity (IRP) is a theory that states the difference between the spot exchange rate and the forward exchange rate between two currencies should equal the difference between their interest rates. This concept extends to crypto derivatives, where the difference between the spot price of a token and its futures price is often determined by the cost of carry, which includes the risk-free interest rate and any borrowing/lending costs.

Any deviation from IRP creates a risk-free arbitrage opportunity.