Forward Rate

Filed Under » , , ,
Dictionary Says

Definition of 'Forward Rate'

A rate applicable to a financial transaction that will take place in the future. Forward rates are based on the spot rate, adjusted for the cost of carry and refer to the rate that will be used to deliver a currency, bond or commodity at some future time. It may also refer to the rate fixed for a future financial obligation, such as the interest rate on a loan payment.
Investopedia Says

Investopedia explains 'Forward Rate'

In forex, the forward rate specified in an agreement is a contractual obligation that must be honored by the parties involved. For example, consider an American exporter with a large export order pending for Europe, and undertakes to sell 10 million euros in exchange for dollars at a rate of 1.35 euros per U.S. dollar in six months' time. The exporter is obligated to deliver 10 million euros at the specified rate on the specified date, regardless of the status of the export order or the exchange rate prevailing in the spot market at that time. Forward rates are widely used for hedging purposes in the currency markets, since currency forwards can be tailored for specific requirements, unlike futures, which have fixed contract sizes and expiry dates and therefore cannot be customized.

In the context of bonds, forward rates are calculated to determine future values. For example, an investor can purchase a one-year Treasury bill or buy a six-month bill and roll it into another six-month bill once it matures. The investor will be indifferent if they both produce the same result. The investor will know the spot rate for the six-month bill and the one-year bond, but he or she will not know the value of a six-month bill that is purchased six months from now. Given these two rates though, the forward rate on a six-month bill will be the rate that equalizes the dollar return between the two types of investments mentioned earlier.

Articles Of Interest

  1.

    Interpreting Volume For The Futures Market

    Learn how to read the volume reports, look at the relation to liquidity and interpret volume using open interest.

  2. Options On Futures: A World Of Potential Profit

    There's one simple hurdle in the transition from stock to futures options: learning about product specifications.

  3. Futures Fundamentals

    For those who are new to futures but want a solid understanding of them, this tutorial explains what futures contracts are, how they work and why investors use them.

  4. How Interest Rates Affect The Housing Market

    Understand how rate changes can affect home prices, and learn how you can keep up.

  5. Arbitrage Squeezes Profit From Market Inefficiency

    This influential strategy capitalizes on the relationship between price and liquidity.

  6. Uncovering Oil And Gas Futures

    Find out how to stay on top of data reports that could cause volatility in oil and gas markets.

  7. Trading Is Timing

    Learn how to make gains even if you don't get in at the right time.

  8. Leading Economic Indicators Predict Market Trends

    Leading indicators help investors to predict and react to where the market is headed.

  9. Exploring Non-Dollar Currencies For Forex Trading

    Learn how investments in foreign currencies can diversify your portfolio.

  10. Candlestick Charting: What Is It?

    Discover the components and basic patterns of this ancient technical analysis technique.
comments powered by Disqus
Marketplace
Hot Definitions

  1. Xenocurrency

    A currency that trades in markets outside of its domestic borders.

  2. Wanton Disregard

    A standard of severe negligence. Wanton disregard is a very serious accusation that indicates that a person behaved extremely recklessly.

  3. Ultra ETF

    A class of exchange-traded funds (ETF) that employs leverage in an effort to achieve double the return of a set benchmark.

  4. Toehold Purchase

    A purchase of less than 5% of a target company's outstanding stockmade by an acquiring company. A toehold purchase of just under 5%, while not a significant stake in a firm, allows the shareholders a "toe-holds" grip on the company and its decision making.

  5. Samurai Bond

    A yen-denominated bond issued in Tokyo by a non-Japanese company and subject to Japanese regulations.

  6. Chartalism

    A non-mainstream theory of money that emphasizes the impact of government policies and activities on the value of money.
Trading Center
http://sp.fastclick.net/ad/tr/10858-64082-15546-0?mpt=c9e325b0c9981355ba87d9c1abd316b5