👨‍🏫 Calculating Forward Rates 👨‍🏫 (This is the most important post for Experts. If you have not joined my Telegram group till now, join it immediately t.me/BOproFAQ ) Forward exchange rates for currencies are exchange that anticipate the rate at a future point in time, as opposed to spot exchange rates, which are current rates. An understanding of forward rates is fundamental to interest rate parity, especially as it pertains to arbitrage (the simultaneous purchase and sale of an asset in order to profit from a difference in the price). The basic equation for calculating forward rates with the U.S. dollar as the base currency is: Forward Rate = Spot Rate × 1 + IRO / 1 + IRD ​ where: IRO = Interest rate of overseas country IRD = Interest rate of domestic country ​  Forward rates are available from banks and currency dealers for periods ranging from less than a week to as far out as five years and beyond. As with spot currency quotations, forwards are quoted with a bid-ask spread. A currency with lower interest rates will trade at a forward premium in relation to a currency with a higher interest rate. In the example shown above, the U.S. dollar trades at a forward premium against the Canadian dollar; conversely, the Canadian dollar trades at a forward discount versus the U.S. dollar. Can forward rates be used to predict future spot rates or interest rates? On both counts, the answer is no. A number of studies have confirmed that forward rates are notoriously poor predictors of future spot rates. Given that forward rates are merely exchange rates adjusted for interest rate differentials, they also have little predictive power in terms of forecasting future interest rates.  The difference between the forward rate and spot rate is known as swap points. In the above example, the swap points amount to 50. If this difference (forward rate minus spot rate) is positive, it is known as a forward premium; a negative difference is termed a forward discount. #NMBO434

Calculating Forward Rates

(This is the most important post for Experts. If you have not joined my Telegram group till now, join it immediately t.me/BOproFAQ )

Forward exchange rates for currencies are exchange that anticipate the rate at a future point in time, as opposed to spot exchange rates, which are current rates. An understanding of forward rates is fundamental to interest rate parity, especially as it pertains to arbitrage (the simultaneous purchase and sale of an asset in order to profit from a difference in the price).

The basic equation for calculating forward rates with the U.S. dollar as the base currency is:

Forward Rate = Spot Rate × 1 + IRO / 1 + IRD ​
where:
IRO = Interest rate of overseas country
IRD = Interest rate of domestic country
​


Forward rates are available from banks and currency dealers for periods ranging from less than a week to as far out as five years and beyond. As with spot currency quotations, forwards are quoted with a bid-ask spread.

A currency with lower interest rates will trade at a forward premium in relation to a currency with a higher interest rate. In the example shown above, the U.S. dollar trades at a forward premium against the Canadian dollar; conversely, the Canadian dollar trades at a forward discount versus the U.S. dollar.

Can forward rates be used to predict future spot rates or interest rates? On both counts, the answer is no. A number of studies have confirmed that forward rates are notoriously poor predictors of future spot rates. Given that forward rates are merely exchange rates adjusted for interest rate differentials, they also have little predictive power in terms of forecasting future interest rates.


The difference between the forward rate and spot rate is known as swap points. In the above example, the swap points amount to 50. If this difference (forward rate minus spot rate) is positive, it is known as a forward premium; a negative difference is termed a forward discount.

#NMBO434

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