Terrance Moore

How to Calculate the Forward Price/Rate

If the Moroccan Durham 4 years from now is expected to have an annual interest rate of 3.8%, whereas the U.S. annual interest rate is 7.9%. The spot rate for Durham is 265.41 Durhams per dollar. What would the forward rate be?

First the equation to find the forward rate would be a modification to the following equation:

F0 / S0 = {(1 + rforeign) / (1 + rdomestic)}T

to:

F0 = {(1 + rforeign) / (1 + rdomestic)}T * S0

With the following information given in the problem we can now solve for the forward rate.

S0 = 265.41 T = 4 rforeign = 0.038 rdomestic = 0.079

Inserting these values and solving will give the following solution:

F0 = {(1 + 0.038) / (1 + 0.079)}4 * 265.41

= {1.038 / 1.079 }4 * 265.41

= {0.96200185357}4 * 265.41

= 0.856453197912282 * 265.41

= 227.31124 or approx. \$227.31

According to Investopedia, the forward rate is the amount that it will cost to deliver a currency, commodity, or some other asset at a future date. The forward rate is the price used to determine the price of a futures contract. It accounts for holding costs, appreciation and demand for the good.

So therefore it would cost \$237.31 to deliver the Moroccan Durham four years from now at the aforementioned interests rates.

Bibliography

Forward Rates
http://www.investopedia.com
page revision: 0, last edited: 10 Dec 2008 00:45