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Forward Exchange Rate

The agreed future exchange rate implied by interest-rate differentials (covered interest parity).

Formula

F=S×1+id1+ifF = S \times \dfrac{1 + i_d}{1 + i_f}

Variables

FForward rate
SSpot rate
i_dDomestic interest rate
i_fForeign interest rate

Example

S 1.10, i_d 5%, i_f 3%: F ≈ 1.121

Did You Know?

If forward rates strayed from this formula, riskless arbitrage would instantly push them back into line.

forwardparityhedging