Forward Exchange Rate Calculator (Interest Rate Parity)

How it works

Covered interest rate parity: F = S × (1 + i_quote × d/basis) ÷ (1 + i_base × d/basis) for tenors up to a year · beyond a year: F = S × [(1 + i_quote) ÷ (1 + i_base)]^(d/basis) · forward points = (F − S) ÷ pip size · annualized premium = (F ÷ S − 1) × basis ÷ d

Banks do not forecast forward exchange rates — they derive them by arbitrage. Borrowing one currency, converting it at spot and depositing the other must cost the same as locking in a forward, so the forward rate equals spot adjusted by the interest-rate gap over the period (covered interest rate parity). The currency with the higher interest rate trades at a forward discount, the lower-rate currency at a premium. Dealers quote the gap as forward points added to spot; real quotes also include a bid-ask spread and the cross-currency basis, so treat this as the theoretical mid rate.

Worked example

EUR/USD spot is 1.0850, the euro rate 2.5% and the dollar rate 4.5%. For 90 days on an Actual/360 basis, F = 1.0850 × (1 + 0.045 × 90/360) ÷ (1 + 0.025 × 90/360) = 1.0850 × 1.01125 ÷ 1.00625 = 1.09039. That is 53.9 forward points above spot: the euro, the lower-yielding currency, trades at an annualized forward premium of about 1.99%.

Sources: Investopedia — Interest Rate Parity (IRP) · Bank for International Settlements — Covered interest parity lost

Frequently asked questions