Forward Rate

An exchange rate agreed today for a currency exchange that will happen on a future date.

Example

A one-year forward on EUR/USD of 1.1214 when spot is 1.1000.

Important

A forward rate is set by interest rate differences, not by what the market expects the exchange rate to be.

Related terms

Interest Rate Parity — The relationship that sets forward exchange rates so that differences in interest rates between two currencies are offset.
Spot price — The price at which the physical good changes hands today, set by how much of it exists and how much is being used.

Lessons that explain it

No earnings, no dividends - just relative rates, inflation and flows — A currency has no cash flow to value. Its price reflects interest rates, inflation, trade and capital flows and sentiment, and forward prices are set mechanically by interest rate differences. (11 min)

All 578 terms in the Investing glossary

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