The forward exchange rate (also referred to as forward rate or forward price) is the exchange rate at which a bank agrees to exchange one currency for another at a future date when it enters into a forward contract with an investor. Multinational corporations, banks, and other financial institutions enter into forward contracts to take advantage of the forward rate for hedging purposes. The forward exchange rate is determined by a parity relationship among the spot exchange rate and differences in interest rates between two countries, which reflects an economic equilibrium in the foreign exchange market under which arbitrage opportunities are eliminated. When in equilibrium, and when interest rates vary across two countries, the parity condition implies that the forward rate includes a premium or discount reflecting the interest rate differential. Forward exchange rates have important theoretical implications for forecasting future spot exchange rates. Financial economists have put forth a hypothesis that the forward rate accurately predicts the future spot rate, for which empirical evidence is mixed.
Read more about Forward Exchange Rate: Introduction, Relation To Covered Interest Rate Parity, Forward Premium or Discount
Famous quotes containing the words exchange and/or rate:
“I know nothing which life has to offer so satisfying as the profound good understanding, which can subsist, after much exchange of good offices, between two virtuous men, each of whom is sure of himself, and sure of his friend. It is a happiness which postpones all other gratifications, and makes politics, and commerce, and churches, cheap.”
—Ralph Waldo Emerson (1803–1882)
“All of us failed to match our dreams of perfection. So I rate us on the basis of our splendid failure to do the impossible.”
—William Faulkner (1897–1962)