Fx Forward Rate Formula Calculator

Forward Rate Formula (Continuous):

\[ F = S \times e^{(r_d - r_f) \times t} \]

Spot Rate (S):

Domestic Interest Rate (r_d):

Foreign Interest Rate (r_f):

Time (t):

years

Forward Rate (F):

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1. What is the Fx Forward Rate Formula?

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

Purpose: It helps financial professionals and investors determine the appropriate forward exchange rate for currency hedging and arbitrage strategies.

2. How Does the Calculator Work?

The calculator uses the formula:

\[ F = S \times e^{(r_d - r_f) \times t} \]

Where:

\( F \) — Forward exchange rate
\( S \) — Current spot exchange rate
\( r_d \) — Domestic risk-free interest rate (decimal)
\( r_f \) — Foreign risk-free interest rate (decimal)
\( t \) — Time to delivery in years
\( e \) — Euler's number (~2.71828)

Explanation: The formula calculates the forward rate based on interest rate parity, where the forward premium/discount reflects the interest rate differential between two currencies.

3. Importance of Forward Rate Calculation

Details: Accurate forward rate calculation is essential for currency hedging, international investment decisions, and arbitrage opportunities in foreign exchange markets.

4. Using the Calculator

Tips: Enter the spot exchange rate, domestic and foreign interest rates (in %), and time period in years. The calculator automatically converts percentage rates to decimals.

5. Frequently Asked Questions (FAQ)

Q1: Why use continuous compounding?
A: Continuous compounding simplifies calculations and is commonly used in financial mathematics, though results are very similar to discrete compounding for normal time periods.

Q2: How do I interpret the forward rate?
A: If F > S, the domestic currency is at a forward discount; if F < S, it's at a forward premium relative to the foreign currency.

Q3: What time period should I use?
A: Use the actual time to forward contract maturity (e.g., 0.25 for 3 months, 0.5 for 6 months, 1 for 1 year).

Q4: Does this account for credit risk?
A: No, this calculates the theoretical forward rate based on risk-free rates. Market forward rates may include credit risk premiums.

Q5: Can I use this for any currency pair?
A: Yes, as long as you have the correct spot rate and corresponding domestic/foreign interest rates for the currency pair.