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The forward exchange rate depends on three known variables: the spot exchange rate, the domestic interest rate, and the foreign interest rate. This effectively means that the forward rate is the price of a forward contract, which derives its value from the pricing of spot contracts and the addition of information on available interest rates.
The forward rate is the future yield on a bond. It is calculated using the yield curve . For example, the yield on a three-month Treasury bill six months from now is a forward rate .
F = forward rate; S = spot rate; r d = simple interest rate of the term currency; r f = simple interest rate of the base currency; T = tenor (calculated according to the appropriate day count convention) The forward points or swap points are quoted as the difference between forward and spot, F - S, and is expressed as the following:
The forward price (or sometimes forward rate) is the agreed upon price of an asset in a forward contract. [ 1 ] [ 2 ] Using the rational pricing assumption, for a forward contract on an underlying asset that is tradeable, the forward price can be expressed in terms of the spot price and any dividends.
The forward curve is a function graph in finance that defines the prices at which a contract for future delivery or payment can be concluded today. For example, a futures contract forward curve is prices being plotted as a function of the amount of time between now and the expiry date of the futures contract (with the spot price being the price at time zero).
The Baltic Dry Index (or BDI) is a basket of ship sizes and routes that reflects the change in spot shipping rates for dry shippers. It has roughly tripled so far this year along with the stock ...
Compared to their futures counterparts, forwards (especially Forward Rate Agreements) need convexity adjustments, that is a drift term that accounts for future rate changes. In futures contracts, this risk remains constant whereas a forward contract's risk changes when rates change. [11]
A forward rate agreement's (FRA's) effective description is a cash for difference derivative contract, between two parties, benchmarked against an interest rate index. That index is commonly an interbank offered rate (-IBOR) of specific tenor in different currencies, for example LIBOR in USD, GBP, EURIBOR in EUR or STIBOR in SEK.