Price of one unit of foreign currency in domestic currency.
Duration of the investment period.
Calculation Result:
Expected Spot Rate (E(S₁)): 0
Understanding the Expected Spot Rate
The expected spot rate is a financial forecast of what a currency's exchange rate will be at a specific point in the future. This calculation is primarily based on Interest Rate Parity (IRP), which suggests that the difference in interest rates between two countries should be reflected in the changes in their exchange rates.
i_domestic: Annual interest rate in the home country (decimal).
i_foreign: Annual interest rate in the foreign country (decimal).
t: Time period in years.
Practical Example
Imagine the current exchange rate (S₀) for EUR/USD is 1.10 (meaning 1 Euro costs 1.10 USD). If the US (domestic) interest rate is 5% and the European (foreign) interest rate is 3% for a 1-year horizon:
Domestic factor: (1 + 0.05) = 1.05
Foreign factor: (1 + 0.03) = 1.03
Calculation: 1.10 × (1.05 / 1.03) = 1.1213
In this scenario, the expected spot rate in one year would be 1.1213. This implies that the US Dollar is expected to depreciate against the Euro to offset the higher interest rate yield available in the US.
function calculateExpectedSpotRate() {
var s0 = parseFloat(document.getElementById("currentSpotRate").value);
var id = parseFloat(document.getElementById("domesticRate").value);
var ifor = parseFloat(document.getElementById("foreignRate").value);
var t = parseFloat(document.getElementById("timeHorizon").value);
var resultDiv = document.getElementById("resultContainer");
var outputRate = document.getElementById("outputRate");
var appreciationText = document.getElementById("appreciationText");
if (isNaN(s0) || isNaN(id) || isNaN(ifor) || isNaN(t)) {
alert("Please enter valid numeric values for all fields.");
return;
}
// Convert percentages to decimals
var id_decimal = id / 100;
var if_decimal = ifor / 100;
// Expected Spot Rate Logic (Uncovered Interest Rate Parity formula)
// E(S1) = S0 * (1 + id*t) / (1 + if*t)
var expectedRate = s0 * ((1 + (id_decimal * t)) / (1 + (if_decimal * t)));
// Formatting result
var finalResult = expectedRate.toFixed(4);
outputRate.innerText = finalResult;
resultDiv.style.display = "block";
// Insight text
var percentageChange = (((expectedRate – s0) / s0) * 100).toFixed(2);
if (expectedRate > s0) {
appreciationText.innerText = "The foreign currency is expected to appreciate by approximately " + percentageChange + "% against the domestic currency over this period.";
} else if (expectedRate < s0) {
appreciationText.innerText = "The foreign currency is expected to depreciate by approximately " + Math.abs(percentageChange) + "% against the domestic currency over this period.";
} else {
appreciationText.innerText = "The exchange rate is expected to remain stable based on the provided interest rates.";
}
}