Forward Rate
The agreed exchange rate or yield for a transaction that will be settled at a specified future date.
What is Forward Rate?
The forward rate is the price agreed today for a transaction that will be settled at a future date. In foreign exchange, a forward rate is calculated by adjusting the current spot rate for the interest rate differential between two currencies — a concept formalized in the covered interest rate parity condition. If US rates are higher than eurozone rates, the dollar will trade at a forward discount to the euro (the euro's forward rate will be above spot). In fixed income, forward rates represent the implied future interest rate for a specific period, derived from the current spot yield curve. They are used in pricing interest rate swaps, forward rate agreements (FRAs), and floating-rate instruments.
Example
The USD/EUR spot rate is 0.92. US 3-month interest rates are 5.25% and eurozone rates are 3.50%. The 3-month forward rate is approximately 0.92 × (1 + 0.035/4) / (1 + 0.0525/4) ≈ 0.9151. A European exporter selling goods to the US can lock in this rate now, protecting against dollar weakness by the time payment is received.
Source: BIS — Foreign Exchange Turnover