1. What is Forward Rate?

The forward rate is the agreed-upon exchange rate for a future transaction between two currencies. It's calculated based on the spot rate and the interest rate differential between the two currencies.

2. How Does the Calculator Work?

The calculator uses the forward rate formula:

Where:

• \( Spot \) — Current exchange rate between two currencies
• \( r_d \) — Domestic interest rate (%)
• \( r_f \) — Foreign interest rate (%)

Explanation: The formula accounts for the interest rate differential between two currencies to determine the future exchange rate.

3. Importance of Forward Rate Calculation

Details: Forward rates are crucial for hedging currency risk in international trade and investments. They help businesses and investors lock in exchange rates for future transactions, reducing uncertainty.

4. Using the Calculator

Tips: Enter the current spot rate, domestic interest rate, and foreign interest rate as percentages. All values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between spot rate and forward rate?
A: Spot rate is the current exchange rate, while forward rate is the agreed-upon rate for a future transaction.

Q2: When should I use forward rates?
A: Forward rates are used when you want to hedge against currency fluctuations in future international transactions.

Q3: How do interest rates affect forward rates?
A: Currencies with higher interest rates typically trade at a forward discount, while those with lower rates trade at a forward premium.

Q4: Are forward rates accurate predictors of future spot rates?
A: While forward rates incorporate market expectations, they are not always accurate predictors of future spot rates due to various economic factors.

Q5: Can forward rates be negative?
A: In theory, forward rates can be negative in extreme market conditions, though this is rare in practice.