Foreign Currency Rates

Forward Outright Rate = Spot* {(1+ Variable_rate*(Days/Year)}/{1+Base_rate*(Days/Year)} Forward Margin = {Days*Spot*(Variable_Rate - Base_Rate)/(Year + (Days*Base_Rate)}

Forward Outright Rate = purchase or sale of a foreign currency for settlement at a future date.

Future Outright Rate = function of the spot rate and interest rate future.

Theory says that there should be interest rate parity between the domestic currency and the foreign currency; otherwise an arbitrage opportunity will arise.

Worked example:

Base currency rate (US) = 1.0%
Variable currency rate (EUR) = 3.0%
Spot rate (EUR/USD) = 1.21
Days = 31
Year days = 360

The forward outright = {1.21*((1+(0.03*(31/360)}/{(1+(0.01*31/360} = 1.23

Forward margin = 0.002082.

Open the Forex spreadsheet in Investment-Calc 7.2.