Currency Forward Calculator

1. What is the Currency Forward Calculator?

Definition: The Currency Forward Calculator computes the forward price of the GBP/MYR currency pair based on the spot price and adjusted interest rates over a specified contract period.

Purpose: Helps traders and businesses determine future exchange rates for hedging or speculation, accounting for interest rate differentials between GBP and MYR.

2. How Does the Calculator Work?

The calculator evaluates the currency forward price in four steps using these formulas:

Formulas:

\( P = \text{Annualized Price Interest Rate} \times \frac{D}{360} \)

\( B = \text{Annualized Base Interest Rate} \times \frac{D}{360} \)

\( F = S \times \frac{1 + P}{1 + B} \)

Where:

\( P \): Price currency interest rate (GBP)
\( B \): Base currency interest rate (MYR)
\( F \): Forward price
\( S \): Spot price
\( D \): Number of days in the contract

Steps:

Step 1: Estimate Price Currency Interest Rate (\( P \)). Multiply the annualized GBP interest rate by the fraction of the year (days/360).
Step 2: Calculate Base Currency Interest Rate (\( B \)). Multiply the annualized MYR interest rate by the fraction of the year (days/360).
Step 3: Determine Current Spot Price (\( S \)). Use the current market exchange rate.
Step 4: Calculate Currency Forward Price (\( F \)). Multiply the spot price by the ratio of (1 + price currency interest rate) to (1 + base currency interest rate).

3. Importance of Currency Forward Calculation

Calculating the currency forward price is crucial for:

Hedging: Protects against exchange rate fluctuations in international trade or investments.
Speculation: Allows traders to profit from anticipated currency movements.
Financial Planning: Assists in budgeting for future currency transactions based on expected rates.

4. Using the Calculator

Example (GBP/MYR): Days: 90, Annualized GBP Interest Rate: 0.8%, Annualized MYR Interest Rate: 3.2%, Spot Price: 0.1735:

Step 1: \( P = 0.8\% \times \frac{90}{360} = 0.2\% \).
Step 2: \( B = 3.2\% \times \frac{90}{360} = 0.8\% \).
Step 3: \( S = 0.1735 \).
Step 4: \( F = 0.1735 \times \frac{1 + 0.002}{1 + 0.008} = 0.1725 \).
Results: \( P = 0.2\% \), \( B = 0.8\% \), \( F = 0.1725 \).

The forward price of 0.1725 indicates the expected GBP/MYR exchange rate after 90 days, adjusted for interest rate differentials.

5. Frequently Asked Questions (FAQ)

Q: What is a currency forward?
A: A currency forward is a contract to buy or sell GBP/MYR at a set price on a future date, based on current spot price and interest rates.

Q: Why are interest rates important in forward pricing?
A: They reflect the cost of borrowing or lending each currency, influencing the forward price through interest rate differentials.

Q: Can the forward price be lower than the spot price?
A: Yes, if the MYR interest rate exceeds the GBP interest rate, as seen in the example (0.1725 < 0.1735).