How to calculate implied interest rate

Written by sarah metzker erdemir
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How to calculate implied interest rate
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Implied interest rate is used to predict how costly a future interest rate will be. Implied interest rates are used in futures trading of commodities, securities and currencies, where a buyer agrees to purchase these in the future at an expected rate, and she needs to accurately assess future costs. Implied interest rate is determined by calculating the difference between the spot rate and the forward rate.

Skill level:
Easy

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Things you need

  • Spot rate
  • Forward rate

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Instructions

  1. 1

    Learn the spot rate of the commodity, currency or security you're trading in. Determined daily by LIBOR, the spot rate is the current rate quoted to a buyer and reflects what the interest rate will be for the next two days, until an immediate transaction is completed.

  2. 2

    Learn the forward rate of the commodity, currency or security. Also determined daily by LIBOR, the forward rate is used to establish the price of a futures contract. The forward rate includes holding costs, as well as expected demand and appreciation.

  3. 3

    Calculate the implied rate by subtracting the spot rate from the forward rate. For example, if the LIBOR spot rate is 6 per cent and the LIBOR forward rate is 6.5 per cent, the implied rate is .5 per cent.

  4. 4

    Use the result to assess your future costs. A result of .5 per cent implies that the future interest rate will be more expensive than the current one.

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