1. What is Forward Rate?

The forward rate is the agreed-upon exchange rate for a future transaction between two currencies, calculated based on the spot rate and interest rate differentials between the two currencies.

2. How Does the Calculator Work?

The calculator uses the continuous compounding forward rate formula:

Where:

• \( F \) — Forward exchange rate
• \( S \) — Spot exchange rate
• \( r_d \) — Domestic risk-free interest rate (in decimal)
• \( r_f \) — Foreign risk-free interest rate (in decimal)
• \( t \) — Time to delivery in years
• \( e \) — Euler's number (~2.71828)

Explanation: The formula accounts for interest rate differentials between two currencies, with continuous compounding.

3. Importance of Forward Rate Calculation

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

4. Using the Calculator

Tips: Enter spot rate, domestic and foreign interest rates (as percentages), and time in years. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between forward and spot rates?
A: Spot rate is for immediate delivery, while forward rate is for future delivery, incorporating interest rate differentials.

Q2: When would you use continuous compounding?
A: Continuous compounding is often used in theoretical models and when dealing with very short-term contracts or frequent compounding periods.

Q3: What affects forward rates?
A: Primarily interest rate differentials between the two currencies, but also market expectations and risk premiums.

Q4: How accurate are forward rates as predictors?
A: Forward rates are not perfect predictors but reflect market expectations and interest rate parity conditions.

Q5: What's the difference between outright and swap forward rates?
A: Outright forward specifies the actual future rate, while swap points represent the difference between forward and spot rates.