Why is the forward rate different from the spot rate?

The forward rate reflects the interest rate differential between the two currencies. If the domestic rate is higher than the foreign rate, the domestic currency trades at a forward discount. This prevents risk-free arbitrage.

How is a currency forward used to hedge?

A company expecting to receive foreign currency in 90 days can sell it forward today at the locked-in forward rate, eliminating exchange rate uncertainty. The cost of the hedge is embedded in the spot-forward differential.

What is the difference between simple and compound interest convention here?

For forwards under one year, money market convention uses simple interest: F = S x (1 + r_d x T) / (1 + r_f x T). For one year or longer, annual compounding applies: F = S x (1 + r_d)^T / (1 + r_f)^T. The calculator selects the formula based on tenor.

Currency Forward Rate Calculator

Calculate the currency forward exchange rate using covered interest rate parity, given the spot rate and the interest rates of both countries.

By AbraCalc Editorial Team · Reviewed by AbraCalc Methodology Review · Last reviewed: 2026-06-25

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How to use this tool

Enter spot exchange rate (domestic per foreign), domestic interest rate (annual), foreign interest rate (annual) and forward period in the fields above.
Results update instantly as you type — or click Calculate.
Read your forward exchange rate and the full breakdown beneath it.

⚠ This tool provides general estimates for education only and is not financial, tax or legal advice. Figures may not reflect your situation — verify with a qualified professional.

Formula

Covered Interest Rate Parity (annual compounding, T ≥ 1 year):

F = S × (1 + r_d)^T / (1 + r_f)^T

Simple interest (T < 1 year, money market convention):

F = S × (1 + r_d × T) / (1 + r_f × T)

Where S = spot rate, r_d = domestic rate, r_f = foreign rate, T = time in years.

How it works

The currency forward rate is derived from covered interest rate parity (CIP), which states that the forward exchange rate must equal the spot rate adjusted for the interest rate differential between the two countries. If this relationship did not hold, risk-free arbitrage profits would be available.

For periods under one year, the money market convention uses simple interest; for periods of one year or more, annual compounding is applied. This calculator assumes continuously available arbitrage and no transaction costs, which may differ from actual quoted forward rates in practice.

Worked example

1-year forward rate: EUR/USD spot 1.10, US rate 5%, EUR rate 3%

Spot rate S = 1.10 (USD per EUR quoted as domestic/foreign)
Domestic (USD) rate r_d = 5% = 0.05; Foreign (EUR) rate r_f = 3% = 0.03; T = 1 year
F = 1.10 × (1.05)^1 / (1.03)^1 = 1.10 × 1.05 / 1.03
F = 1.10 × 1.019417 = 1.1214

The 1-year forward rate is 1.1214, representing a forward premium of 0.0214 (214 forward points) on the USD.

Common mistakes to avoid

Using annual interest rates directly in the simple-interest formula for a sub-year forward without converting them to the fractional-period equivalent (e.g., using 5% for a 6-month forward instead of 2.5%).
Applying the formula with domestic and foreign rates swapped, producing the reciprocal of the correct forward rate.
Expecting the forward rate to predict the future spot rate -- the forward rate is a no-arbitrage pricing formula, not a market forecast of where the spot rate will actually be.

Key terms

Forward Exchange Rate: The exchange rate agreed upon today for a currency transaction that will occur at a specified future date.
Covered Interest Rate Parity (CIP): The principle that the forward exchange rate must equal the spot rate times the ratio of domestic to foreign interest rate factors, eliminating arbitrage opportunities.
Forward Points (Pips): The difference between the forward rate and the spot rate, often quoted in fractions (pips) rather than as the full forward rate.
Forward Premium / Discount: A forward premium means the domestic currency is expected to appreciate; a discount means it is expected to depreciate relative to the spot rate.
Tenor: The time period of a forward contract, expressed in days, months, or years.

Frequently asked questions

Why is the forward rate different from the spot rate?: The forward rate reflects the interest rate differential between the two currencies. If the domestic rate is higher than the foreign rate, the domestic currency trades at a forward discount. This prevents risk-free arbitrage.
How is a currency forward used to hedge?: A company expecting to receive foreign currency in 90 days can sell it forward today at the locked-in forward rate, eliminating exchange rate uncertainty. The cost of the hedge is embedded in the spot-forward differential.
What is the difference between simple and compound interest convention here?: For forwards under one year, money market convention uses simple interest: F = S x (1 + r_d x T) / (1 + r_f x T). For one year or longer, annual compounding applies: F = S x (1 + r_d)^T / (1 + r_f)^T. The calculator selects the formula based on tenor.