Forward Exchange Rate Calculation Example & Calculator
Understanding how to calculate the forward exchange rate is essential for businesses engaged in international trade, investors hedging currency risk, and students of international finance. The forward rate represents the expected price of a currency pair at a future date, derived from the spot rate and the interest rate differentials between the two currencies.
This tool helps you calculate the theoretical forward rate using the Interest Rate Parity (IRP) concept.
FX Forward Rate Calculator
Current market price of the currency pair.
Domestic rate (Numerator currency). Usually the second currency in the pair (e.g., USD in EUR/USD).
Foreign rate (Denominator currency). Usually the first currency in the pair (e.g., EUR in EUR/USD).
Number of days until contract maturity (Standard 30, 60, 90, 180).
Calculated Forward Rate:–
Forward Points (Pips):–
Premium / Discount:–
function calculateForwardRate() {
// Get input values
var S = parseFloat(document.getElementById("spotRate").value);
var rQuote = parseFloat(document.getElementById("quoteInterestRate").value);
var rBase = parseFloat(document.getElementById("baseInterestRate").value);
var days = parseFloat(document.getElementById("daysDuration").value);
// Validation
if (isNaN(S) || isNaN(rQuote) || isNaN(rBase) || isNaN(days)) {
alert("Please enter valid numeric values for all fields.");
return;
}
if (S <= 0 || days S) {
status = "Trading at a Premium";
} else if (forwardRate < S) {
status = "Trading at a Discount";
} else {
status = "At Par";
}
// Display Results
document.getElementById("resultForwardRate").innerHTML = forwardRate.toFixed(5);
document.getElementById("resultPoints").innerHTML = pips.toFixed(2) + " pips";
document.getElementById("resultStatus").innerHTML = status;
document.getElementById("resultsBox").style.display = "block";
}
How to Calculate Forward Exchange Rates
The forward exchange rate is determined by the spot rate and the interest rate differential between the two currencies involved in the pair. This relationship is governed by the principle of Covered Interest Rate Parity (CIRP), which states that the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate.
The Formula
For short-term forward contracts (less than one year), simple interest is typically used. The formula is as follows:
F = S × [ (1 + iq × (d/360)) / (1 + ib × (d/360)) ]
Where:
F = Forward Exchange Rate
S = Current Spot Exchange Rate
iq = Interest rate of the Quote Currency (Domestic)
ib = Interest rate of the Base Currency (Foreign)
d = Number of days in the contract
360 = Day count convention (typically 360 for USD, EUR, etc.)
Calculation Example
Scenario: A US-based company needs to pay a supplier in Europe in 90 days. They want to lock in a EUR/USD rate.
Step 4: Solve for F
F = 1.1000 × (1.0125 / 1.00875)
F = 1.1000 × 1.003717 F = 1.1041
The 90-day forward rate is 1.1041. Since the forward rate is higher than the spot rate, the Base currency (EUR) is trading at a premium.
Why do Forward Rates Differ from Spot Rates?
Forward rates are not forecasts of where the market will be in the future. Instead, they are mathematical calculations designed to prevent arbitrage. If the forward rate did not align with the interest rate differential, traders could borrow in the low-interest currency, convert it, invest in the high-interest currency, and lock in a profit with a forward contract.
Key Definitions
Forward Premium: When the forward rate is higher than the spot rate. This occurs when the interest rate of the base currency is lower than the quote currency.
Forward Discount: When the forward rate is lower than the spot rate. This occurs when the interest rate of the base currency is higher than the quote currency.
Spot Rate: The current market price for immediate delivery of a currency.
Forward Points: The difference between the forward rate and the spot rate, usually quoted in pips.