Covered Interest Rate Parity

[doobsmeister]

covered interest rate parity means that the difference between spot and forward exchange rates equals the difference in the periodic interest rates of the two currencies - fine this makes sense.
But I don’t understand the next two:
1. The currency with the higher interest rate will trade at a forward discount, F0 < S0
2. The curency with the lower interest rate will trade at a forward premium, F0 >S0
Shouldn’t higher interest rates mean a premium on the currency?

 

[S2000magician]

The USD/GBP spot rate is 1.5425. (I checked.)
Suppose that the 1-year USD risk-free rate is 2.5% and the 1-year GBP risk-free rate is 3.5%. Then the 1-year USD/GBP forward rate is 1.5425 × 1.025 / 1.035 = 1.5276. Thus, GBP trades at a forward discount: you get fewer USD per GBP in the future than today.

 

[FrankCFA]

For example, if you buy a currency with higher interest rate at forward, say AUD. You should be able to get the AUD at spot (T+2) date and deposit it with higher deposit rate but now the payment delay to forward date. Thus, you deserve a discount for it.
Basically, it’s the difference between two currency interest rate. (one you lend and another one you borrow)

doobsmeister wrote:
covered interest rate parity means that the difference between spot and forward exchange rates equals the difference in the periodic interest rates of the two currencies - fine this makes sense.
But I don’t understand the next two:
1. The currency with the higher interest rate will trade at a forward discount, F0 < S0
2. The curency with the lower interest rate will trade at a forward premium, F0 >S0
Shouldn’t higher interest rates mean a premium on the currency?