Understanding spot rates and forward rates is crucial in finance, particularly in foreign exchange (FX) markets and fixed-income securities. These rates help investors and businesses make informed decisions about future transactions and investments.
Spot Rate
The spot rate is the current market price or exchange rate for an asset (like a currency or a bond) for immediate delivery. "Immediate" typically means within two business days for most currencies and securities.
Forward Rate
The forward rate is an exchange rate or price agreed upon today for a transaction that will occur at a specified future date. This rate is determined by the current spot rate and the interest rate differentials between the two currencies or markets involved.
How to Calculate Forward Rates
A common method to calculate the 1-year forward rate for a currency pair (e.g., USD/EUR) involves using the spot rate and the interest rates for each currency. The formula is based on the principle of no-arbitrage, meaning that investing in either currency directly or converting to the other currency and investing there should yield the same return over the period.
Domestic Interest Rate: The interest rate for the domestic currency (the first currency in the pair, e.g., USD in USD/EUR).
Foreign Interest Rate: The interest rate for the foreign currency (the second currency in the pair, e.g., EUR in USD/EUR).
For simplicity, this calculator uses annual interest rates. In practice, rates might be quoted for different tenors (e.g., 3-month, 6-month), and calculations would need to adjust accordingly.
Forward Rate Calculation
function calculateForwardRate() {
var spotRateInput = document.getElementById("spotRate");
var domesticInterestRateInput = document.getElementById("domesticInterestRate");
var foreignInterestRateInput = document.getElementById("foreignInterestRate");
var resultDiv = document.getElementById("result");
var spotRate = parseFloat(spotRateInput.value);
var domesticInterestRate = parseFloat(domesticInterestRateInput.value);
var foreignInterestRate = parseFloat(foreignInterestRateInput.value);
if (isNaN(spotRate) || isNaN(domesticInterestRate) || isNaN(foreignInterestRate)) {
resultDiv.innerHTML = "Please enter valid numbers for all fields.";
return;
}
// Convert percentages to decimals
var domesticRateDecimal = domesticInterestRate / 100;
var foreignRateDecimal = foreignInterestRate / 100;
// Calculate forward rate
var forwardRate = spotRate * (1 + domesticRateDecimal) / (1 + foreignRateDecimal);
resultDiv.innerHTML = "