Forward Rate Solution

STEP 0: Pre-Calculation Summary
Formula Used
Forward Rate = Spot Exchange Rate*ln((Domestic Interest Rate-Foreign Interest Rate)*Time to Maturity)
Fo = Sp*ln((rd-rf)*T)
This formula uses 1 Functions, 5 Variables
Functions Used
ln - Natural logarithm function (base e), ln(Number)
Variables Used
Forward Rate - Forward Rate is the interest rate applicable to a financial transaction that is scheduled to take place in the future.
Spot Exchange Rate - Spot Exchange Rate is the current amount one currency will trade for another currency at a specific point in time.
Domestic Interest Rate - Domestic Interest Rate refers to the interest rate applicable to financial instruments within a particular country.
Foreign Interest Rate - Foreign Interest Rate refers to the prevailing interest rates in a foreign country.
Time to Maturity - Time to Maturity is the time required to mature a bond.
STEP 1: Convert Input(s) to Base Unit
Spot Exchange Rate: 20 --> No Conversion Required
Domestic Interest Rate: 0.9 --> No Conversion Required
Foreign Interest Rate: 0.2 --> No Conversion Required
Time to Maturity: 10 --> No Conversion Required
STEP 2: Evaluate Formula
Substituting Input Values in Formula
Fo = Sp*ln((rd-rf)*T) --> 20*ln((0.9-0.2)*10)
Evaluating ... ...
Fo = 38.9182029811063
STEP 3: Convert Result to Output's Unit
38.9182029811063 --> No Conversion Required
FINAL ANSWER
38.9182029811063 38.9182 <-- Forward Rate
(Calculation completed in 00.004 seconds)

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BMS College of Engineering (BMSCE), Bangalore
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Forward Rate Formula

Forward Rate = Spot Exchange Rate*ln((Domestic Interest Rate-Foreign Interest Rate)*Time to Maturity)
Fo = Sp*ln((rd-rf)*T)

What is Forward Rate?

This formula assumes that there are no transaction costs, no restrictions on capital flows, and no differences in risk between the two currencies. Additionally, it assumes that interest is compounded continuously.

Here's a step-by-step breakdown of the forward rate calculation:

*Identify the Spot Rate (S):
The spot rate is the current exchange rate between the two currencies.
*Determine the Domestic Interest Rate (r_{\text{domestic}}):
This is the interest rate in the country where you are calculating the forward rate.
*Determine the Foreign Interest Rate (r_{\text{foreign}}):
This is the interest rate in the foreign country.
*Identify the Time to Maturity (t):
This represents the time remaining until the date at which the currency exchange will occur.
*Apply the Formula:
Plug the values into the interest rate parity formula to calculate the forward rate.

How to Calculate Forward Rate?

Forward Rate calculator uses Forward Rate = Spot Exchange Rate*ln((Domestic Interest Rate-Foreign Interest Rate)*Time to Maturity) to calculate the Forward Rate, The Forward Rate formula is defined as the exchange rate at which a currency can be exchanged for another currency at a future date. It is determined by the interest rate differentials between the two currencies involved. Forward Rate is denoted by Fo symbol.

How to calculate Forward Rate using this online calculator? To use this online calculator for Forward Rate, enter Spot Exchange Rate (Sp), Domestic Interest Rate (rd), Foreign Interest Rate (rf) & Time to Maturity (T) and hit the calculate button. Here is how the Forward Rate calculation can be explained with given input values -> 38.9182 = 20*ln((0.9-0.2)*10).

FAQ

What is Forward Rate?
The Forward Rate formula is defined as the exchange rate at which a currency can be exchanged for another currency at a future date. It is determined by the interest rate differentials between the two currencies involved and is represented as Fo = Sp*ln((rd-rf)*T) or Forward Rate = Spot Exchange Rate*ln((Domestic Interest Rate-Foreign Interest Rate)*Time to Maturity). Spot Exchange Rate is the current amount one currency will trade for another currency at a specific point in time, Domestic Interest Rate refers to the interest rate applicable to financial instruments within a particular country, Foreign Interest Rate refers to the prevailing interest rates in a foreign country & Time to Maturity is the time required to mature a bond.
How to calculate Forward Rate?
The Forward Rate formula is defined as the exchange rate at which a currency can be exchanged for another currency at a future date. It is determined by the interest rate differentials between the two currencies involved is calculated using Forward Rate = Spot Exchange Rate*ln((Domestic Interest Rate-Foreign Interest Rate)*Time to Maturity). To calculate Forward Rate, you need Spot Exchange Rate (Sp), Domestic Interest Rate (rd), Foreign Interest Rate (rf) & Time to Maturity (T). With our tool, you need to enter the respective value for Spot Exchange Rate, Domestic Interest Rate, Foreign Interest Rate & Time to Maturity and hit the calculate button. You can also select the units (if any) for Input(s) and the Output as well.
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