How to calculate forward & spot rates for currency

Written by sam grover
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How to calculate forward & spot rates for currency
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The forward and spot rates of currencies are the rates at which you can buy or sell a currency. Forward rates are predetermined prices for a predetermined future date, while spot rates are the rates for purchasing a currency right now. While the majority of forward and spot rates are calculated based on the global forex market's ebb and flow, it is still possible to set them yourself if your target market does not have access to the global market.

In short, forward and spot rates are entirely dependent on the market's behaviour; there is no formula to calculate them.

Skill level:
Moderate

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Instructions

  1. 1

    Assess which currencies are in highest demand at the moment.

  2. 2

    Determine how much someone is prepared to pay for a currency in exchange for the currency right now. For example, if you have British pounds and your neighbour wants to buy them in exchange for U.S. dollars right now, the price he is willing to pay for those dollars right now is your spot rate.

  3. 3

    Assess how much someone is prepared to pay in exchange for a certain amount of currency in the future. For example, if your neighbour wants to buy some of his dollars back from you when he returns from the United Kingdom, the price that you agree upon for those dollars is the forward rate.

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