Currency Forward Calculator

With this currency forward calculator, you can easily calculate the currency forward price — the price of a currency forward contract. A currency forward contract is a commonly used derivative of the hedge currency exposure.

This article will help you understand what is a currency forward contract and how to calculate the current forward price. We will also demonstrate some examples to help you understand the concept.

Currency forward is essentially an agreement that allows you to buy or sell your currency at hand at a fixed currency exchange rate in the future. The price of the currency forward is determined using the interest rate parity between the two currencies, which we will explain in the section below.

There are two main benefits of using currency forwards instead of currency futures. First, unlike currency futures, which have fixed and standardized terms, currency forwards allow parties to tailor the agreement to fit their specific needs. Second, currency forwards do not require upfront payment to enter into the agreement.

Now, we can discuss the calculation of currency forward price. Let's take the currency forward between GBP/MYR as an example. GBP stands for the British pound sterling, and MYR stands for the Malaysian ringgit.

• Currency forward: GBP/MYR;
• Number of days in the forward contract: 90 days;
• Price currency: GBP;
• Base currency: MYR;
• Annualised price currency interest rate: 0.8%; and
• Annualised base currency interest rate: 3.2%.

Evaluating the currency forward price requires 4 steps:

1. Estimate the price currency interest rate

   The calculation of the price currency interest rate involves adjusting its annualized interest rates. We can easily find most annualized currency interest rates on the market. The price currency in this example is GBP, and the annualized interest rate for GBP is 0.8%.

   We can calculate the price currency interest rate using the formula below:

   price currency interest rate = annualised price currency interest rate × (days / 360).

   Hence, the price currency interest rate for this currency forward interest rate is 0.8% × (90 / 360) = 0.2%.

2. Calculate the base currency interest rate

   Similarly, we need to adjust the annualized base currency internet rate. The base currency for this example is MYR, and the annualized interest rate for MYR is 3.2%.

   We can work out the base currency interest rate using the formula below:

   base currency interest rate = annualised base currency interest rate × (days / 360)

   Hence, the base currency interest rate for this currency forward interest rate is 3.2% × (90 / 360) = 0.8%.

3. Determine the current spot price

   You can find the current spot price easily by just googling it or through some financial data websites such as Xe.

   The current spot price for GBP/MYR is 0.1735.

4. Calculate the currency forward price

   The final step is to evaluate the currency forward price using the following formula:

   currency forward price = spot price × (1 + price currency interest rate) / (1 + base currency interest rate)

   For our GBP/MYR currency forward contract, its price is 0.1735 × (1.002 / 1.008) = 0.1725.

There are 3 main usages of a currency forward contract:

1. Currency forward contracts can be used in hedging.

   A company can hedge its foreign currency exposure by engaging in currency forward contracts. For example, suppose a company needs to exchange GBP 1,000,000 to MYR in 1 year. To ensure that the transaction will not be affected by the development of the currency spot rate, the company can engage in a currency forward contract and lock in a particular currency exchange rate.

   By doing this, the company eliminates any risks associated with negative currency movement. However, it also forgoes some potential profit should the currency exchange rate move in its favor.

Check our risk calculator to learn more about the concept of risk.

2. Currency forward contract can be used in speculating.

   One can take a long position in a currency forward contract if they think that the base currency will appreciate against the price currency, and vice versa.

3. Currency forward contract can be used in arbitrage.

   Arbitrage is the act of earning profits by exploiting mispricing in different markets. Arbitrageurs can buy currency forward contracts and short their underlying currency exchange rate if they think the currency forward contract is undervalued (check our cross exchange rate calculator for estimating the cross exchange rate).