Forward Exchange Rate Calculator

Forward Exchange Rate Formula:

\[ \text{Forward} = \text{Spot} \times \frac{(1 + i_{\text{base}} \times t)}{(1 + i_{\text{quote}} \times t)} \]

Spot Rate:

Base Currency Interest Rate:

Quote Currency Interest Rate:

Time Period:

years

Forward Exchange Rate:

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1. What is Forward Exchange Rate?

The forward exchange rate is the exchange rate at which a bank agrees to exchange one currency for another at a future date when it enters into a forward contract with an investor. It accounts for interest rate differentials between the two currencies.

2. How Does the Calculator Work?

The calculator uses the forward exchange rate formula:

\[ \text{Forward} = \text{Spot} \times \frac{(1 + i_{\text{base}} \times t)}{(1 + i_{\text{quote}} \times t)} \]

Where:

\( \text{Spot} \) — Current exchange rate
\( i_{\text{base}} \) — Interest rate of the base currency (decimal)
\( i_{\text{quote}} \) — Interest rate of the quote currency (decimal)
\( t \) — Time period in years

Explanation: The formula adjusts the spot rate based on the interest rate differential between the two currencies over the specified time period.

3. Importance of Forward Rates

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

4. Using the Calculator

Tips: Enter the current spot exchange rate, interest rates for both currencies (as percentages), 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 delivery, while forward rates are for future delivery and account for interest rate differentials.

Q2: When does forward rate equal spot rate?
A: When the interest rates of both currencies are equal, or when the time period is zero.

Q3: What is forward premium/discount?
A: A forward premium occurs when the forward rate is higher than the spot rate (quote currency is at a discount). A forward discount is the opposite.

Q4: How accurate are forward rates as predictors?
A: Forward rates are not perfect predictors of future spot rates but reflect interest rate differentials and market expectations.

Q5: What factors can cause deviations?
A: Transaction costs, credit risk, liquidity constraints, and market inefficiencies can cause deviations from the theoretical forward rate.