1. What is Forward Rate Calculation?

Definition: This calculator determines the forward exchange rate based on the spot rate and interest rate differentials between two currencies.

Purpose: It helps investors and financial professionals understand future currency exchange rates based on current market conditions.

2. How Does the Calculator Work?

The calculator uses the 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 interest rate parity, showing how currencies should adjust over time based on interest rate differences.

3. Importance of Forward Rate Calculation

Details: Forward rates are crucial for hedging currency risk, pricing forward contracts, and making international investment decisions.

4. Using the Calculator

Tips: Enter the current spot rate, domestic and foreign interest rates (in decimal form), 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 rate is for immediate exchange, while forward rate is agreed now for future exchange.

Q2: Why do interest rates affect forward rates?
A: Currencies with higher interest rates typically trade at a forward discount to offset the interest differential.

Q3: How do I convert annual percentage rates to decimals?
A: Divide the percentage by 100 (e.g., 5% = 0.05).

Q4: What time period should I use?
A: Use the exact time to maturity of your forward contract (e.g., 0.5 for 6 months).

Q5: Does this formula account for all market factors?
A: No, it's based on interest rate parity theory; actual rates may vary due to risk premiums and market expectations.