Forward exchange rate

A currency exchange rate for an exchange to be done in the future, which can be 30 days, 60 days, 90 days, 180 days or one year. When a firm buys or longs a currency forward, it is obliged to exchange a specific amount of the base currency for a specific amount of price currency on a future date specified in the contract.

The no-arbitrage relationship between the forward rate, spot rate, and interest rates is:

Forward exchange rate = Spot exchange rate x (1+rp)/(1+rb)

rp: risk-free rate of price currency

rb: risk-free rate of base currency

See also: Spot exchange rate

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