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Interpreting Forward Rates
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Forward rates provide expected prices of currencies at later dates and are determined by the spot rate and the interest rates of the two countries represented by the currencies. When evaluated in American terms:


Countries with interest rates higher than those in the US have currencies that trade at a discount to the spot rate.
Countries with interest rates lower than those in the US have currencies that trade at a premium to the spot rate.


Forward quotations come in 3 forms: premium, discount, and flat.


Premium – A currency is selling for more in the future than in the spot market.

Discount – A currency sells for less in the future than in the spot market.

Flat – A currency sells for the same amount in the future as in the spot market.

 

Details: Interpreting Forward Rates

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