1. What is a Forward Rate?

A forward rate is the agreed-upon exchange rate for a future transaction between two currencies. It's derived from the spot rate and adjusted for the interest rate differential between the two currencies over the time period.

2. How Does the Calculator Work?

The calculator uses the forward rate formula:

Where:

• \( Forward \) — Future exchange rate
• \( Spot \) — Current exchange rate
• \( Domestic\ Rate \) — Interest rate of the base currency (decimal)
• \( Foreign\ Rate \) — Interest rate of the quote currency (decimal)
• \( t \) — Time period in years

Explanation: The formula accounts for the interest rate differential between two currencies to determine the fair future exchange rate.

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 rate, domestic and foreign interest rates (as decimals, 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: Why do forward rates differ from spot rates?
A: They account for the interest rate differential between two currencies over the time period.

Q3: What is a forward premium or discount?
A: When the forward rate is higher than spot, it's a premium; when lower, it's a discount.

Q4: How accurate are forward rates at predicting future spot rates?
A: While they incorporate market expectations, they're not perfect predictors due to unforeseen market movements.

Q5: Can this formula be used for any time period?
A: Yes, but the interest rates should match the time period (annual rates for years, etc.).