Forward exchange rate.
In plain English
A forward exchange rate is the price set today for a currency exchange that settles on an agreed future date. It comes from the spot rate adjusted for the interest rate difference between the two currencies over that period, because otherwise a trader could borrow in one currency, lend in the other, and pocket a riskless gain. The currency with the higher interest rate trades at a forward discount, and the lower-rate one at a forward premium. Businesses use forwards to fix the home-currency value of a payment or receipt they already know is coming. Funds use them to strip currency movement out of foreign holdings.
01Why it matters
A company with a foreign bill due in six months can fix the cost today, which turns an unknown into a budget line, and the same arithmetic prices the currency hedges inside funds you may already own.
02The math, step by step
Say spot is 1.10 dollars per euro, dollar rates sit 2 percentage points above euro rates, and the term is one year. The one-year forward lands near 1.10 times 1.02, about 1.122 dollars per euro. Lock that and a 100,000 euro bill costs 112,200 dollars wherever spot ends up.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
The forward rate is not a prediction. It is arithmetic on the spot rate and the interest rate gap. If the actual rate on the settlement date lands somewhere else, that is normal, because pricing out arbitrage is a different job from forecasting.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice