1. What is Forward Exchange Rate?

The forward exchange rate is the exchange rate at which a bank agrees to exchange one currency for another at a future date when it enters into a forward contract with an investor. It accounts for interest rate differentials between the two currencies.

2. How Does the Calculator Work?

The calculator uses the forward rate formula:

Where:

• \( \text{Spot} \) — Current exchange rate (decimal)
• \( r_d \) — Domestic interest rate (decimal)
• \( r_f \) — Foreign interest rate (decimal)
• \( t \) — Time in years

Explanation: The formula adjusts the spot rate based on the interest rate differential between the two currencies over the specified time period.

3. Importance of Forward Rate Calculation

Details: Forward rates are essential for hedging currency risk, pricing forward contracts, and understanding market expectations about future currency movements.

4. Using the Calculator

Tips: Enter spot rate and interest rates in decimal form (e.g., 0.05 for 5%), and time in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between spot and forward rates?
A: Spot rates are for immediate delivery, while forward rates are for future delivery and account for interest rate differentials.

Q2: When is the forward rate higher than the spot rate?
A: When the domestic interest rate is higher than the foreign rate (the currency is said to be in a forward premium).

Q3: How accurate are forward rates in predicting future spot rates?
A: Forward rates are not perfect predictors but reflect market expectations and interest rate differentials.

Q4: What's the typical time frame for forward contracts?
A: Common time frames are 1 month, 3 months, 6 months, and 1 year, though custom periods can be arranged.

Q5: Do forward rates account for inflation?
A: Indirectly, as interest rates typically reflect inflation expectations through the Fisher effect.