A forward exchange rate isn’t set by a bank’s markup the way a retail conversion fee is — it’s priced from the interest rate differential between the two currencies.
How it works
Covered interest rate parity sets the forward rate so that borrowing in one currency, converting, and investing in the other yields the same result as investing directly — the domestic-to-foreign interest rate ratio, applied over the forward period, is what moves the forward rate away from spot.
What this does not include
Real forward contracts also include a dealer spread on top of the theoretical parity rate — this calculator computes the theoretical fair value, not a specific bank’s actual quoted rate.
How to use this calculator
- Enter the spot rate, domestic and foreign interest rates, and days until the forward settles.
Frequently asked questions
Why does a higher domestic interest rate push the forward rate above spot?
Because covered interest rate parity prevents a risk-free arbitrage — if domestic rates are higher, the forward rate must be more expensive to strip out that risk-free advantage.
What are “forward points”?
The difference between the forward rate and the spot rate — positive points mean the domestic currency is forecast to weaken against the foreign currency over that period, and vice versa for negative points.
Is a forward contract the same as a currency option?
No — a forward is an obligation to exchange at the agreed rate; an option gives the right but not the obligation, at a separate premium cost this calculator doesn’t compute.
