Outright Forward Rate Calculation

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Outright Forward Rate Calculator

360 Days (Actual/360) 365 Days (Actual/365)

Calculation Results

Outright Forward Rate:

Forward Points (Pips):

Understanding the Outright Forward Rate

In the foreign exchange market, an outright forward rate is the contracted exchange rate for a transaction that will occur on a specific future date. Unlike the spot rate, which is for immediate delivery (usually T+2), the forward rate allows businesses and investors to lock in an exchange rate today to mitigate currency risk.

How the Calculation Works

The forward rate is not a prediction of where the currency will be in the future. Instead, it is mathematically derived from the spot rate and the interest rate differential between the two currencies involved. This is known as Interest Rate Parity.

The core formula used in this calculator is:

Forward Rate = Spot Rate × [ (1 + (Domestic Rate × Days / Basis)) / (1 + (Foreign Rate × Days / Basis)) ]
  • Spot Rate: The current market price of the currency pair.
  • Domestic Interest Rate: The annual interest rate of the "Price" currency (the second currency in the pair).
  • Foreign Interest Rate: The annual interest rate of the "Base" currency (the first currency in the pair).
  • Days to Maturity: The number of days until the settlement of the contract.
  • Basis: Usually 360 or 365 days, depending on the currency's market standard.

Forward Points: Premium vs. Discount

The difference between the spot rate and the forward rate is expressed as forward points (or pips).

  • If the forward rate is higher than the spot rate, the base currency is trading at a forward premium.
  • If the forward rate is lower than the spot rate, the base currency is trading at a forward discount.

Practical Example

Suppose you are looking at the EUR/USD pair:

  • Spot Rate: 1.1000
  • USD Interest Rate (Domestic): 5.0%
  • EUR Interest Rate (Foreign): 3.0%
  • Tenor: 180 Days
  • Day Count: 360

Using the interest rate parity formula, the domestic side grows faster than the foreign side, leading to an outright forward rate of approximately 1.1107. The 107 pip difference represents the cost of carry or the benefit of the interest rate differential.

function calculateForwardRate() { var spot = parseFloat(document.getElementById('spotRate').value); var domesticRate = parseFloat(document.getElementById('domesticRate').value) / 100; var foreignRate = parseFloat(document.getElementById('foreignRate').value) / 100; var days = parseFloat(document.getElementById('daysToMaturity').value); var basis = parseFloat(document.getElementById('dayCount').value); if (isNaN(spot) || isNaN(domesticRate) || isNaN(foreignRate) || isNaN(days) || isNaN(basis) || spot <= 0 || days = 0 ? "+" : "") + points.toFixed(2) + " pips"; var note = ""; if (forwardRate > spot) { note = "The base currency is trading at a forward premium because the domestic interest rate is higher than the foreign interest rate."; } else if (forwardRate < spot) { note = "The base currency is trading at a forward discount because the foreign interest rate is higher than the domestic interest rate."; } else { note = "The forward rate is equal to the spot rate as there is no interest rate differential."; } document.getElementById('premiumDiscountNote').innerText = note; document.getElementById('resultDisplay').style.display = 'block'; }

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