Forward Exchange Rate Calculator
Calculate future exchange rates using Interest Rate Parity
Forward Rate Calculator
Interest Rate Parity: Forward rates are determined by the interest rate differential between two currencies. Higher domestic rates lead to forward discount.
Current exchange rate
Forward contract duration
USD interest rate per annum
EUR interest rate per annum
Forward Rate Result
Rate Comparison
Interest Rate Analysis
📊 Forward Premium/Discount Analysis
🔢 Calculation Formula
Forward Rate = Spot Rate × [(1 + id × t) / (1 + if × t)]
where:
• id = domestic rate (5%)
• if = foreign rate (3%)
• t = time (0.2500 years)
= 1.100000 × [(1 + 0.0500 × 0.2500) / (1 + 0.0300 × 0.2500)]
= 1.105459
Example: USD/EUR Forward Rate
Scenario
A US company needs to pay €1,000,000 to a European supplier in 90 days. They want to lock in the exchange rate today to avoid currency risk.
Given Information
• Current spot rate: 1 USD = 0.92 EUR (or USD/EUR = 0.92)
• US interest rate: 5.0% per annum
• EU interest rate: 3.0% per annum
• Time horizon: 90 days
Calculation
1. Time in years: 90/360 = 0.25 years
2. Forward Rate = 0.92 × [(1 + 0.05 × 0.25) / (1 + 0.03 × 0.25)]
3. Forward Rate = 0.92 × [1.0125 / 1.0075]
4. Forward Rate = 0.92 × 1.00496
5. 90-Day Forward Rate = 0.9246 USD/EUR
Interpretation
The forward rate (0.9246) is higher than the spot rate (0.92), indicating a forward premium. This means the USD is expected to weaken against the EUR due to higher US interest rates. The company can enter a forward contract at 0.9246, locking in certainty for their payment.
When to Use Forward Rates
Hedge future currency payments or receipts
Lock in exchange rates for budgeting
Eliminate foreign exchange risk
Compare different currency funding options
Speculate on interest rate differentials
Key Concepts
Interest Rate Parity
Theory stating that forward rates reflect interest rate differentials between countries
Forward Premium
When forward rate > spot rate; currency expected to appreciate
Forward Discount
When forward rate < spot rate; currency expected to depreciate
Hedging
Using forward contracts to eliminate currency risk in future transactions
Understanding Forward Exchange Rates
What is a Forward Exchange Rate?
A forward exchange rate is an agreed-upon exchange rate for a currency transaction that will occur at a specified future date. It allows businesses and investors to lock in an exchange rate today for a transaction that will happen later, eliminating uncertainty about future currency movements.
Interest Rate Parity (IRP)
Interest Rate Parity is the fundamental principle behind forward rates. It states that the difference between forward and spot exchange rates should equal the interest rate differential between two countries. If one country has higher interest rates, its currency will trade at a forward discount.
Forward Rate Formula
F = S × [(1 + id × t) / (1 + if × t)]
F = Forward rate
S = Spot rate
id = Domestic interest rate
if = Foreign interest rate
t = Time in years (days/360)
Forward Premium Formula
Premium (%) = (F - S) / S × 100
Annualized Premium = Premium × (360 / days)
Practical Applications
🏢 Importers/Exporters
Lock in exchange rates for future payments to suppliers or receipts from customers
💼 Investors
Hedge foreign investment returns against currency fluctuations
🏦 Corporations
Budget with certainty for international operations and transactions
Forward Premium vs Discount
Forward Premium
- • Forward rate > Spot rate
- • Currency expected to appreciate
- • Foreign interest rate < Domestic rate
- • Example: USD/EUR at premium when US rates > EU rates
Forward Discount
- • Forward rate < Spot rate
- • Currency expected to depreciate
- • Foreign interest rate > Domestic rate
- • Example: USD/EUR at discount when US rates < EU rates