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