Forward Exchange Rate Calculation Formula

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Forward Exchange Rate Calculator

Annualized interest rate of the second currency in the pair.
Annualized interest rate of the first currency in the pair.
360 Days (Standard) 365 Days (GBP/AUD etc)
Please enter valid numeric values for all fields.
Calculated Forward Rate: –
Forward Points (Pips): –
Base Currency Status: –
Rate Differential: –

Forward Exchange Rate Calculation Formula Explained

The forward exchange rate is the rate at which a bank agrees to exchange one currency for another at a future date when it enters into a forward contract with an investor. This calculator uses the concept of Interest Rate Parity (IRP) to determine the fair future value of a currency pair based on the interest rate differentials between the two economies.

The Formula

To calculate the forward rate manually, the standard formula used in foreign exchange markets is:

F = S × [ (1 + rd × t) / (1 + rf × t) ]

Where:

  • F = The Forward Exchange Rate
  • S = The Current Spot Exchange Rate
  • rd = Interest rate of the Quote (Domestic) currency
  • rf = Interest rate of the Base (Foreign) currency
  • t = Time to maturity (Days / Day Count Basis)

Understanding Base vs. Quote Currency

In a currency pair like EUR/USD:

  • EUR is the Base Currency (rf applies here).
  • USD is the Quote/Price Currency (rd applies here).

If the interest rate of the Quote currency (USD) is higher than the Base currency (EUR), the forward rate will be higher than the spot rate. This means the Base currency is trading at a Premium.

Conversely, if the Quote currency has a lower interest rate than the Base currency, the forward rate will be lower, meaning the Base currency is trading at a Discount. This mechanism prevents risk-free arbitrage opportunities in the global market.

Example Calculation

Suppose the Spot Rate (S) for GBP/USD is 1.2500.

  • Quote Rate (USD): 5.0%
  • Base Rate (GBP): 4.0%
  • Time: 180 Days (using 360 day basis)

Numerator: 1 + (0.05 × 180/360) = 1 + 0.025 = 1.025
Denominator: 1 + (0.04 × 180/360) = 1 + 0.020 = 1.020
Forward Rate = 1.2500 × (1.025 / 1.020) ≈ 1.2561

function calculateForwardRate() { // 1. Get input values var spotInput = document.getElementById('fwd_spot_rate').value; var quoteRateInput = document.getElementById('fwd_quote_rate').value; var baseRateInput = document.getElementById('fwd_base_rate').value; var daysInput = document.getElementById('fwd_days').value; var dayCountBasis = parseFloat(document.getElementById('fwd_day_count').value); // 2. Validate inputs if (spotInput === "" || quoteRateInput === "" || baseRateInput === "" || daysInput === "") { document.getElementById('fwd_error_msg').style.display = "block"; document.getElementById('fwd_result_container').style.display = "none"; return; } var spot = parseFloat(spotInput); var r_quote = parseFloat(quoteRateInput); // Percentage var r_base = parseFloat(baseRateInput); // Percentage var days = parseFloat(daysInput); if (isNaN(spot) || isNaN(r_quote) || isNaN(r_base) || isNaN(days) || spot <= 0 || days < 0) { document.getElementById('fwd_error_msg').style.display = "block"; document.getElementById('fwd_error_msg').innerText = "Please enter valid positive numbers."; document.getElementById('fwd_result_container').style.display = "none"; return; } document.getElementById('fwd_error_msg').style.display = "none"; // 3. Perform Logic // Convert percentages to decimals var r_quote_dec = r_quote / 100; var r_base_dec = r_base / 100; // Calculate time factor var timeFactor = days / dayCountBasis; // Calculate Numerator (1 + rd * t) var numerator = 1 + (r_quote_dec * timeFactor); // Calculate Denominator (1 + rf * t) var denominator = 1 + (r_base_dec * timeFactor); // Calculate Forward Rate var forwardRate = spot * (numerator / denominator); // Calculate Forward Points (Standard Pips) // Points = Forward Rate – Spot Rate var pointsRaw = forwardRate – spot; // Determine decimal precision based on spot rate // Typically 4 decimals for standard pairs, 2 for JPY var precision = 4; var pipMultiplier = 10000; if (spot.toString().indexOf('.') !== -1) { if (spot 0.5) { // Typical range for major pairs precision = 4; pipMultiplier = 10000; } if (spot > 50) { // e.g., JPY pairs precision = 2; pipMultiplier = 100; } } var forwardPoints = pointsRaw * pipMultiplier; // Determine Premium or Discount (Relative to Base Currency) var statusText = ""; if (forwardRate > spot) { statusText = "Premium (Forward > Spot)"; } else if (forwardRate < spot) { statusText = "Discount (Forward 0 ? "+" : "") + rateDiff.toFixed(2) + "%"; document.getElementById('fwd_result_container').style.display = "block"; }

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