1. What is Forward Rate?

The forward rate is the agreed-upon exchange rate for a currency pair to be settled at a future date. It's derived from the spot rate and adjusted for the interest rate differential between the two currencies.

2. How Does the Calculator Work?

The calculator uses the forward rate formula:

Where:

• \( F \) — Forward exchange rate
• \( S \) — Current spot exchange rate
• \( r_d \) — Domestic interest rate (decimal)
• \( r_f \) — Foreign interest rate (decimal)
• \( t \) — Time in years

Explanation: The formula accounts for the interest rate differential between two currencies over time, adjusting the spot rate to reflect this difference.

3. Importance of Forward Rate Calculation

Details: Forward rates are crucial for hedging foreign exchange risk, pricing forward contracts, and understanding market expectations about future currency movements.

4. Using the Calculator

Tips: Enter the current spot rate, domestic and foreign interest rates in decimal form (e.g., 5% = 0.05), and the time period in years. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between spot and forward rates?
A: Spot rates are for immediate settlement (typically 2 business days), while forward rates are for future settlement dates.

Q2: When does forward rate equal spot rate?
A: When the interest rate differential between the two currencies is zero (r_d = r_f).

Q3: What does a higher forward rate indicate?
A: It suggests the market expects the domestic currency to depreciate relative to the foreign currency (or that domestic interest rates are higher).

Q4: How accurate are forward rates as predictors?
A: While they incorporate current expectations, they're not perfect predictors of future spot rates due to market uncertainties.

Q5: Can this be used for any currency pair?
A: Yes, the formula applies to any two currencies as long as you input the correct domestic and foreign interest rates.