Valuing a Forward Contract

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

(1)\begin{equation} F_{0} = S_{0}(1+r_{f})^T \end{equation}

F_{0} |
Forward rate |

S_{0} |
Spot rate |

r_{f} |
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