Valuing a Forward Contract

The following formula can be used to determine the forward rate in T years:

\begin{equation} F_{0} = S_{0}(1+r_{f})^T \end{equation}
F0 Forward rate
S0 Spot rate
rf Risk-free rate
T Time until Majurity

Forward Rate: An agreed-upon price at which two currencies will be exchanged at some future date.
Spot Rate: The effective exchange rate of a foreign currency for delivery on the (approximately) current date.
Risk-free Rate: The rate of interest on a security that is free of all risk.

Definitions Source:
Brighan, Eugene F., and Joel F. Houston. Fundamentals of Financial Management. 5th ed. Mason, OH: Thomas, 2007. 182 & 573.

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License