Currency Forward Calculator
Calculate forward exchange rates using interest rate parity. Currency forwards allow you to lock in an exchange rate for future transactions, eliminating currency risk.
Current Market Rates
Interest Rates
Forward Rate Results
Forward Rate:
0.0000
Forward Premium/Discount:
Interest Rate Differential:
0.00%
Hedging Analysis
Hedging Cost:
$0.00
Risk Reduction:
100%
Forward Points:
0.00
Currency Analysis
Currency Strength:
N/A
Expected Movement:
N/A
Carry Trade Signal:
N/A
Understanding Currency Forwards
Currency forwards are agreements to exchange currencies at a predetermined rate on a future date. They are used to hedge currency risk and lock in exchange rates for international transactions. Forward rates are determined by the interest rate differential between two currencies.
Interest Rate Parity
Covered Interest Rate Parity
- Forward Rate = Spot Rate × (1 + i_domestic) / (1 + i_foreign)
- Eliminates arbitrage opportunities
- Links spot and forward markets
- Assumes no transaction costs
Forward Premium/Discount
- Forward Premium: F > S (currency expected to strengthen)
- Forward Discount: F < S (currency expected to weaken)
- Annualized as percentage of spot rate
- Reflects market expectations
Forward Rate Calculation
How Forward Rates Are Determined
The mathematics behind forward pricing
Annual Forward Rate
- F = S × (1 + r_d) / (1 + r_f)
- F = Forward rate
- S = Spot rate
- r_d = Domestic interest rate
- r_f = Foreign interest rate
Continuous Compounding
- F = S × e^(r_d - r_f) × t
- e = Exponential function
- t = Time in years
- More precise for short periods
- Used in Black-Scholes model
Forward Points
| Currency Pair | Spot Rate | 1-Month Forward | Forward Points | Premium/Discount |
|---|---|---|---|---|
| EUR/USD | 1.1000 | 1.1025 | 25 | Premium |
| USD/JPY | 110.00 | 109.85 | -15 | Discount |
| GBP/USD | 1.3000 | 1.3020 | 20 | Premium |
Hedging Applications
Import/Export Hedging
- Lock in exchange rates for future payments
- Eliminate currency risk on contracts
- Budget certainty for international transactions
- Protect profit margins
Investment Hedging
- Hedge foreign currency investments
- Lock in repatriation rates
- Manage currency exposure
- Reduce portfolio volatility
Speculative Trading
- Bet on interest rate differentials
- Carry trade strategies
- Arbitrage opportunities
- Leveraged currency positions
Risk Management
- Corporate treasury management
- Multinational cash flow hedging
- Balance sheet hedging
- Economic exposure management
Advantages and Disadvantages
Advantages
- Complete elimination of currency risk
- Customizable amounts and maturities
- No margin requirements
- Private transactions
Disadvantages
- Credit risk of counterparty
- Less liquid than exchange-traded products
- Potential opportunity cost if rates move favorably
- Requires relationship with financial institution
Forward vs Futures
Currency Forwards
- Customized contracts
- Negotiated between parties
- Any amount and maturity
- Credit risk considerations
Currency Futures
- Standardized contracts
- Exchange-traded
- Fixed amounts and maturities
- Guaranteed by exchange
Key Takeaways for Currency Forward Calculator
- Currency forwards lock in exchange rates for future transactions
- Forward rates are determined by interest rate differentials between currencies
- The calculator uses interest rate parity to compute fair forward rates
- Forwards provide complete hedging but require counterparty credit risk assessment
- Forward premiums occur when the domestic currency has higher interest rates
- Forward discounts occur when the domestic currency has lower interest rates
- Forwards are essential tools for managing currency risk in international business
- Use the calculator to determine hedging costs and lock in favorable exchange rates