# How Forward Rates are Calculated in Foreign Exchange

The method of calculation of forward rates is similar to that for spot rates. The only difference is that in the case of forward rates, the forward margin that is included in the rate will be for the forward period as well. That is, the forward discount or the forward premium included in the buying rate will not only be for the transit period and usance but also for the forward period.

For instance, if the bank buys a 30 days sight bill for 2 months forward, the total forward discount will be for (30 days usance + 20 days transit + 2 months forward, rounded off to higher month) 4 months. For selling rates, forward margin is not considered for calculation of spot rates. For forward rates, the forward margin for the forward period will be included. In other respects, the calculation is same as that for spot rates.

The method of calculation of forward rates is tabulated below. The term foreign currency is used to denote a currency other than US dollar and Indian rupee Separate table for TT buying is not given since the method is  as that for bill. buying rate. For TT buying rate, forward margin will be included only for forward period.

### Calculation of FORWARD BUYING RATE

Dollar/Rupee market spot buying rate = xxx

Add: Forward premium (for forward period, transit period and usance period: rounded off to lower month)

OR

Less: Forward discount (for forward period, transit period and usance period: rounded off to higher month) ± Rs. xxx

= Rs. xxx

Less: Exchange Margin — Rs. xxx

Forward buying rate for dollar = Rs. xxx….(1)

Dollar/Foreign currency market spot selling rate = FC. xxx

Add: Forward premium (for forward period, transit period and usance period: rounded off to higher month)

OR

Less: Forward discount (for forward period, transit period and usance period: rounded off to lower month) ± FC xxx

= FC ..(2)

Forward buying rate for foreign currency = (1) divided by (2) = Rs. xxx

* Rounded off to nearest paise.

### Calculation of FORWARD SELLING RATES

Dollar/Rupee market spot selling rate
Rs. ….xxx
Add: Forward premium (for forward period) OR Less: Forward discount (for forward period)…xxx
Add: Exchange Margin to TT selling rate ….xxx

=Forward TT selling rate for dollar…xxx  (1)

Add: Exchange Margin for selling rate …xxx

=Forward bills selling rate for dollar …xxx (2)

Dollar/Foreign currency spot buying rate = FC

OR

Less: Forward discount (for forward period)….xxx

Forward TT selling rate for foreign currency (1) divided by (3)

Forward bill selling rate for foreign currency (2) divided by (3)

*Rounded off to nearest paise when quoted to customer

### Option Forward Rates

In the case of an option forward contract customer has the option of delivery over a given period. For example, if the option is over the third month, the customer has the option of delivery earliest by the end of second month or latest by the end of third month.

Therefore, the banker has to take into account both these extreme possibilities and quote the rate He may take the forward margin relevant for 2 months (earliest delivery) or for 3 months (later delivery) whichever is beneficial to him. This would depend upon the forward margin—premium or discount—and the transaction—purchase or sale.

Check Also
Close