Valuing a Forward Contract

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

(1)
$$F_{0} = S_{0}(1+r_{f})^T$$
 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.

page revision: 6, last edited: 08 Sep 2008 23:41