Currency Forward Calculator

What is a Currency Forward Rate?

A Currency Forward Rate is the exchange rate agreed upon today for a foreign currency transaction that will occur on a specific future date (the maturity date). Forward contracts allow businesses and investors to hedge against foreign exchange rate fluctuations and lock in future currency conversion rates.

Interest Rate Parity (IRP) Formula

The forward exchange rate is determined by the Covered Interest Rate Parity (IRP) theory. According to IRP, the difference in interest rates between two countries determines the forward premium or discount relative to the spot exchange rate.

Under simple interest (standard money market convention):

$$F = S \times \left( \frac{1 + i_d \times \frac{t}{Y}}{1 + i_f \times \frac{t}{Y}} \right)$$

Where:

• $F$ = Forward exchange rate
• $S$ = Spot exchange rate
• $i_d$ = Domestic annual interest rate (in decimal format)
• $i_f$ = Foreign annual interest rate (in decimal format)
• $t$ = Days to maturity of the forward contract
• $Y$ = Day count convention (typically 360 or 365 days per year)

Forward Premium and Discount

If the domestic interest rate is higher than the foreign interest rate ($i_d > i_f$), the foreign currency trades at a forward premium ($F > S$). Conversely, if $i_d < i_f$, the foreign currency trades at a forward discount ($F < S$).

The annualized forward premium or discount percentage is computed as:

$$\text{Annualized Premium/Discount (\%)} = \left( \frac{F - S}{S} \right) \times \left( \frac{Y}{t} \right) \times 100$$