3

FORWARD RATES

3.1 Forward exchange rates

3.2 Forward interest rates

3.3 Do forward rates predict future spot rates?

3.4 Spot and forward rates in practice

Before looking at financial engineering products such as FRAs and futures, it is necessary to introduce the important concept of the forward rate. The forward rate is the price the market sets for an instrument traded today, but where the resulting transaction is executed on some date in the future, sometimes the far distant future. The most common forward rates are those quoted for forward FX deals and forward interest rates. These are now discussed in turn.

3.1 Forward exchange rates

At first sight, it may seem highly risky for a bank to quote the rate for a foreign exchange deal set ...

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