FX Forward Rate

The agreed exchange rate for a future currency transaction, derived from Covered Interest Rate Parity.

Covered Interest Rate Parity (CIRP) states that the FX forward rate must equal: F(d/f) = S(d/f) × e^((r_d − r_f)×T). If this did not hold, investors could borrow in the low-rate currency, invest in the high-rate currency, and lock in the exchange rate with a forward to earn risk-free profits. CIRP ensures no such arbitrage exists. Forward points = (F − S) × 10,000 pips. A positive interest rate differential (r_d > r_f) means the domestic currency trades at a forward premium.

Formula

F(d/f) = S(d/f) \cdot e^{(r_d - r_f)T}

Related Terms

Cost of Carry

The net financing cost of holding an asset — interest paid minus dividends/income received.

Equity Forward Contract

A commitment to buy or sell an equity at a fixed price F₀(T) at a future date T, priced to have zero value at inception.

Discount Factor (DF)

The present value of $1 receivable at a future time T, derived from the zero curve: DF = e^(−rT).

Covered Interest Rate Parity (CIP)

Forward rate equals spot rate adjusted for interest rate differentials.

Forward Points

The adjustment added to spot rate to calculate a forward exchange rate.