1. What is the Forward Rate to Spot Rate Formula?

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

Purpose: It helps investors and financial professionals determine the expected future exchange rate between two currencies.

2. How Does the Formula Work?

The formula is:

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, adjusting the spot rate by the interest rate differential between the two currencies.

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.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between spot and forward rates?
A: The spot rate is for immediate exchange, while the forward rate is set now for an exchange at a future date.

Q2: How do I convert annual percentage rates to decimals?
A: Divide the percentage by 100 (e.g., 5% becomes 0.05).

Q3: What happens if domestic rates are higher than foreign rates?
A: The forward rate will typically be higher than the spot rate (forward premium).

Q4: Can this formula be used for any currency pair?
A: Yes, it works for any two currencies as long as you correctly identify which is domestic and foreign.

Q5: How accurate are forward rate predictions?
A: While based on interest rate parity, actual future rates may differ due to market changes and risk premiums.