Forward Exchange Rate | Formula | Examples

Forward exchange rate is the exchange rate at which a party is willing to enter into a contract to receive or deliver a currency at some future date.

Currency forwards contracts and future contracts are used to hedge the currency risk.

This rate is called forward exchange rate. Forward exchange rates are determined by the relationship between spot exchange rate and interest or inflation rates in the domestic and foreign countries.

Using the relative purchasing power parity, forward exchange rate can be calculated using the following formula:. Where, f is forward exchange rate in terms of units of domestic currency per unit of foreign currency; s is spot exchange rate, in terms of units of domestic currency per unit of foreign currency; I d domestic inflation rate; I f is foreign inflation rate; and n is number of time periods.

Using the covered interest rate parity, forward exchange rate is calculated using the following formula:. Where, f , s and n stand for the same as stated above; I d domestic interest rate; and I f is foreign interest rate. This is our spot exchange rate.

Inflation rate and interest rate in US were 2. Inflation rate and interest rate in UK were 2.

Written by Obaidullah Jan. Subjects Accounting Economics Finance Management Related Terms Spot Exchange Rate Direct Quote Indirect Quote.