1. What is a One Year Forward Rate Calculator?

Definition: This calculator computes the forward exchange rate based on the spot rate and interest rate differential between two currencies.

Purpose: It helps investors and financial professionals determine the future exchange rate implied by current interest rates.

2. How Does the Calculator Work?

The calculator uses the covered interest rate parity formula:

Where:

• \( F \) — Forward exchange rate (dimensionless)
• \( S \) — Spot exchange rate (dimensionless)
• \( r_d \) — Domestic interest rate (decimal)
• \( r_f \) — Foreign interest rate (decimal)

Explanation: The formula accounts for interest rate differentials between two currencies to determine the fair forward rate.

3. Importance of Forward Rate Calculation

Details: Forward rates are essential for hedging currency risk, pricing forward contracts, and identifying arbitrage opportunities.

4. Using the Calculator

Tips: Enter the current spot rate, domestic interest rate (as decimal), and foreign interest rate (as decimal). Spot rate must be > 0, interest rates ≥ 0.

5. Frequently Asked Questions (FAQ)

Q1: Why does the forward rate differ from the spot rate?
A: The difference reflects the interest rate differential between the two currencies (interest rate parity).

Q2: How do I convert annual percentage rates to decimals?
A: Divide the percentage by 100 (e.g., 5% = 0.05).

Q3: What time period does this calculation assume?
A: This calculates the one-year forward rate. For other periods, adjust the interest rates proportionally.

Q4: When would the forward rate equal the spot rate?
A: When domestic and foreign interest rates are equal (r_d = r_f).

Q5: Can this be used for commodities or other assets?
A: This specific formula applies to currency forwards. Other assets use different forward pricing models.