1. What is the Forward Rate?

The forward rate is the future exchange rate agreed upon today between two currencies, calculated based on the spot rate and interest rate differential between the two currencies.

2. How Does the Calculator Work?

The calculator uses the Forward Rate formula:

Where:

• \( Spot \) — Current exchange rate
• \( r_{dom} \) — Domestic interest rate (in decimal form)
• \( r_{for} \) — Foreign interest rate (in decimal form)
• \( t \) — Time period in years

Explanation: The formula accounts for interest rate parity, where the forward rate reflects the interest rate differential between two currencies.

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 spot rate in percentage, interest rates as decimals (e.g., 5% = 0.05), and 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 rate is for immediate delivery, while forward rate is for future delivery and includes interest rate adjustments.

Q2: When is the forward rate higher than the spot rate?
A: When the domestic interest rate is higher than the foreign interest rate (the currency is at a forward premium).

Q3: How does time affect the forward rate?
A: Longer time periods amplify the effect of interest rate differentials on the forward rate.

Q4: Are forward rates accurate predictors?
A: They reflect current interest rate differentials but aren't perfect predictors of future spot rates.

Q5: What's the relationship with covered interest arbitrage?
A: The formula ensures no arbitrage opportunities exist between spot and forward markets when considering interest rates.