Calculate the fair value of a forward contract based on Interest Rate Parity.
360 Days (Standard)
365 Days (GBP/HKD/AUD)
Calculation Results
Estimated Forward Rate:–
Forward Points:–
Premium/Discount:–
Understanding Currency Forward Rates
A currency forward rate is the exchange rate at which a bank or financial institution agrees to exchange one currency for another at a specific future date. This rate is not a prediction of where the spot rate will be in the future, but rather a calculation based on the interest rate differentials between the two countries.
The Forward Rate Formula
The calculation is based on the Interest Rate Parity (IRP) theory. The standard formula for discrete compounding is:
F = S × [1 + (rd × t)] / [1 + (rf × t)]
F = Forward Rate
S = Current Spot Rate
rd = Domestic (Quote) Interest Rate (annualized)
rf = Foreign (Base) Interest Rate (annualized)
t = Time to maturity (Days / Day Count Convention)
Why do Forward Rates differ from Spot Rates?
The difference between the spot rate and the forward rate is known as the forward points. If the domestic interest rate is higher than the foreign interest rate, the forward rate will typically be higher than the spot rate (the foreign currency trades at a forward premium). Conversely, if the domestic rate is lower, the foreign currency trades at a forward discount.
Practical Example
Suppose you want to calculate the 90-day forward rate for EUR/USD: