1. What is the Forward Rate?

The forward rate is the agreed-upon exchange rate for a future transaction between two currencies, 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
• \( r_d \) — Domestic interest rate (in decimal form)
• \( r_f \) — Foreign interest rate (in decimal form)
• \( t \) — Time period in years
• \( e \) — Euler's number (~2.71828)

Explanation: The formula accounts for interest rate differentials between two currencies and the time value of money.

3. Importance of Forward Rates

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

4. Using the Calculator

Tips: Enter spot rate as a percentage, interest rates in percentage (they'll be converted to decimals), and time in years. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: Why use continuous compounding?
A: Continuous compounding provides mathematical simplicity and is commonly used in financial models, though discrete compounding can also be used.

Q2: How accurate are forward rates as predictors?
A: Forward rates incorporate current market expectations but are not perfect predictors of future spot rates due to market uncertainties.

Q3: What's the difference between outright and swap forward rates?
A: Outright forwards specify the actual future rate, while swap forwards specify the difference (points) from the spot rate.

Q4: When does covered interest rate parity fail?
A: During financial crises or when capital controls are in place, the relationship between spot, forward, and interest rates may break down.

Q5: How do central banks influence forward rates?
A: Through monetary policy affecting interest rates, which in turn affect forward rate calculations.