Forwarding Rate Calculation

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FX Forward Rate Calculator

The current exchange rate between the pair.
Duration of the forward contract.
Annual interest rate of the second currency in the pair.
Annual interest rate of the first currency in the pair.
Actual/360 (Most common, e.g., USD, EUR) Actual/365 (e.g., GBP, AUD, CAD, HKD)
function calculateFXForwardRate() { // 1. Get inputs var spotRate = parseFloat(document.getElementById('spot_rate_input').value); var days = parseInt(document.getElementById('days_to_maturity').value); var domesticRatePct = parseFloat(document.getElementById('domestic_interest_rate').value); var foreignRatePct = parseFloat(document.getElementById('foreign_interest_rate').value); var basis = parseInt(document.getElementById('day_count_basis').value); var resultDiv = document.getElementById('forward_rate_result'); // 2. Validation if (isNaN(spotRate) || spotRate <= 0 || isNaN(days) || days 0) { statusStr = "(Trading at a Premium)"; } else if (rateDifference < 0) { statusStr = "(Trading at a Discount)"; } else { statusStr = "(At Par)"; } // 4. Output resultDiv.style.display = "block"; resultDiv.innerHTML = `

Calculation Results

Estimated Forward Rate:${forwardRate.toFixed(4)} Difference from Spot: ${rateDifference.toFixed(4)} ${statusStr} Based on ${basis}-day count convention. `; }

Understanding FX Forward Rate Calculation based on Interest Rate Parity

A foreign exchange (FX) forward rate is the exchange rate agreed upon today for a transaction that will occur on a specific future date. Unlike the "spot rate," which is for immediate settlement (usually T+2 days), the forward rate accounts for the time value of money between two different currencies.

This calculator uses the principle of **Covered Interest Rate Parity (CIRP)**. This economic theory states that the difference between the forward rate and the spot rate between two currencies should equal the differential in the interest rates of those two countries over the same period. If this were not true, arbitrageurs could make risk-free profits.

The Mechanics of the Calculation

The forward rate determines whether a currency is trading at a "premium" or a "discount" relative to the spot rate.

  • Premium: If the domestic interest rate is higher than the foreign interest rate, the foreign currency will trade at a forward premium (the forward rate will be higher than the spot rate).
  • Discount: If the domestic interest rate is lower than the foreign interest rate, the foreign currency will trade at a forward discount (the forward rate will be lower than the spot rate).

The standard formula used in this tool is:

Forward Rate = Spot Rate × [ (1 + (Domestic Rate × Time)) / (1 + (Foreign Rate × Time)) ]

Where "Time" is calculated as (Days to Maturity / Day Count Basis).

Example Calculation

Imagine a US-based company needs to buy Euros in 90 days to pay a supplier. They want to lock in a rate today to hedge against the Euro getting stronger.

  • Currency Pair: EUR/USD (EUR is Base/Foreign, USD is Quote/Domestic)
  • Current Spot Rate: 1.1000
  • Days to Maturity: 90 days
  • Domestic Rate (USD): 5.50%
  • Foreign Rate (EUR): 3.75%
  • Basis: Actual/360

Because the USD interest rate (5.50%) is higher than the EUR rate (3.75%), the market expects the USD to depreciate slightly against the Euro over time to compensate for the higher yield. The calculated forward rate will be higher than 1.1000 (a premium).

Using the calculator above, the 90-day forward rate would be approximately 1.1048.

Note: This calculator provides a theoretical forward rate based on Interest Rate Parity. Actual market rates offered by banks may differ slightly due to transaction costs, credit risk, and supply/demand imbalances.

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