How the Currency Forward Calculator works
A currency forward is an agreement to exchange two currencies at a fixed rate on a set future date. That fixed rate — the forward rate — is not a market guess about where spot will land. It is derived mechanically from today's spot rate and the interest rates available on each currency, using a no-arbitrage relationship called covered interest rate parity (CIRP). This calculator applies that formula directly.
The formula
For a spot rate S (quoted as domestic currency per one unit of foreign currency), an annualized domestic interest rate id, an annualized foreign interest rate if, and a contract term t expressed as a fraction of a year (days ÷ day-count basis), the forward rate is:
F = S × (1 + id × t) / (1 + if × t)
The gap between F and S is the "forward points." Annualized over the contract term, that gap approximates the interest rate differential (id − if) — the calculator reports both the raw forward points and the annualized premium or discount so you can see the relationship directly.
Why the forward rate isn't just a forecast
Covered interest rate parity exists to prevent risk-free arbitrage. If you could borrow the lower-yielding currency, convert it to the higher-yielding currency at spot, deposit it to earn the higher rate, and lock in a forward contract to convert back at today's spot rate, you would earn a risk-free profit. Markets price the forward rate to close that loophole: the currency with the higher interest rate is set to trade at a forward discount, exactly offsetting its yield advantage. The currency with the lower interest rate trades at a forward premium.
Worked example
Take a spot rate of 1.0850, a domestic rate of 5.25%, a foreign rate of 3.75%, a 90-day term, and the 360-day money-market basis. Here t = 90/360 = 0.25, so F = 1.0850 × (1 + 0.0525×0.25) / (1 + 0.0375×0.25) = 1.0850 × 1.013125 / 1.009375 ≈ 1.0890. That's about 40 forward points above spot, or roughly a 1.49% annualized premium — close to the 1.50-point rate differential, as covered interest rate parity predicts. Converting a 100,000-unit notional at the forward rate settles for about $108,903, versus $108,500 at today's spot rate.
Reading the day-count basis
Money markets conventionally use a 360-day year for short-term interest calculations (common for USD, EUR, and many other currencies), while some markets and longer-dated instruments use 365 days. Switching the basis changes t slightly and therefore changes the computed forward rate — use whichever convention matches the interest rate quotes you're working from.