How to calculate forward currency discount rate

Written by soren bagley
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How to calculate forward currency discount rate
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The forward currency discount rate is a financial term used to describe foreign exchange rates. Specifically, it describes the relationship between the present value of a currency and its expected future value. When a forward currency discount is present it suggests that the currency's value is going to depreciate. However, this is not always the case. It can, and often does, happen that the market's expectation is wrong and the actual depreciation never occurs.

Skill level:
Moderate

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Instructions

  1. 1

    Gather the necessary information. You will need to know the currency's forward rate and spot rate. You will also need to know the number of days in the contract. A forward rate is the expression of a rate that is set in the present but that deals with a promised currency exchange in the future. The spot rate is the rate at which the currency is presently being traded.

  2. 2

    Subtract the currency's spot rate from its forward rate.

  3. 3

    Divide the difference obtained in step 2 by the currency's spot rate. We will call the quotient of these two numbers "x."

  4. 4

    Divide 360 by the number of days in the contract. We will call the quotient of these two numbers "y."

  5. 5

    Multiply "x" by "y." We will call the product of these two number "z."

  6. 6

    Multiply "z" by 100. The product of these two numbers is the forward discount rate.

Tips and warnings

  • The opposite of a forward discount rate is referred to as a forward premium. This occurs when a currency's value is expected to increase rather than decrease.

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