1. What is a Forward Rate Calculator?

Definition: This calculator computes the forward exchange rate based on the spot rate, domestic and foreign interest rates, and time period.

Purpose: It helps investors and financial professionals determine the future exchange rate between two currencies based on interest rate differentials.

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 (in decimal)
• \( r_f \) — Foreign interest rate (in decimal)
• \( t \) — Time in years

Explanation: The formula accounts for interest rate parity, showing how currencies should move based on interest rate differentials.

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 (as percentages), and time period in years. Spot rate and time must be > 0.

5. Frequently Asked Questions (FAQ)

Q1: Why do we need forward rates?
A: Forward rates help businesses and investors lock in exchange rates for future transactions, reducing currency risk.

Q2: How does interest rate affect forward rates?
A: Currencies with higher interest rates typically trade at a forward discount, while those with lower rates trade at a premium.

Q3: What's the difference between spot and forward rates?
A: Spot rates are for immediate delivery, while forward rates are for future delivery and incorporate interest rate differentials.

Q4: Can forward rates predict future spot rates?
A: While forward rates reflect market expectations, they are not perfect predictors of future spot rates.

Q5: How is time period calculated?
A: Time is calculated in years (e.g., 3 months = 0.25 years, 6 months = 0.5 years).