How this instrument works
A currency forward priced this way is not built on annual compounding — it uses the same simple-interest, day-count arithmetic that prices the underlying money-market deposits themselves. Real forward contracts settle on a specific date, commonly 30, 60, 90 or 180 days out, not a tidy calendar year, so the day-count fraction t = days ⁄ 360 lets the rate differential apply only to the slice of a year the money is actually tied up rather than assuming a full twelve months every time.
A corporate treasurer pricing a hedge for a receivable due in exactly 47 days, or an FX forward desk building out a curve of rates across several settlement dates, starts from this same three-rate, one-date calculation before ever seeing a dealer's screen. It is the reference figure a quoted forward gets checked against, not a substitute for dealing one — the number that tells you whether a bank's quote is in the right neighborhood or worth questioning.
The 360-day divisor is a specific choice, not a rounding shortcut: US dollar and euro money-market deposits are conventionally quoted Act/360, so this formula matches how those desks actually compute their own day-count fraction. Sterling is the well-known exception — GBP deposits are traditionally quoted Act/365 — so feeding a domestic or foreign rate from a currency that uses a different day-count convention into this formula without adjusting introduces a small, systematic error the arithmetic itself cannot catch.
- Enter the Spot exchange rate quoted between the two currencies today.
- Set the Domestic interest rate, % — the money-market deposit rate for the currency you are pricing from.
- Set the Foreign interest rate, % — the deposit rate for the other currency, on the same day-count basis.
- Enter Days to forward date — the actual calendar days until the contract settles, not a rounded month or year.
- Read the Forward exchange rate the instrument computes from those two rates and that exact day count.
Worked example — a 90-day forward on a 2-point rate gap
Take the golden case: a spot rate of 1.10, a 5% domestic money-market rate, a 3% foreign rate, and 90 days to settlement. The day-count fraction is t = 90 ⁄ 360 = 0.25, so the domestic factor is 1 + 0.05 × 0.25 = 1.0125 and the foreign factor is 1 + 0.03 × 0.25 = 1.0075. Multiplying spot by the first factor and dividing by the second gives a forward rate of 1.10545905707 — a premium of roughly 0.50% over spot for a two-point annual rate gap held for a quarter.
Stretch the same 5%-versus-3% gap to 180 days instead of 90 and the forward rate moves to about 1.11084 — the day-count fraction doubles to t = 0.5, so both factors move twice as far from 1 and the forward premium over spot roughly doubles as well. A treasurer comparing a 90-day hedge against a 180-day hedge on the same pair sees that scaling directly, without running a separate calculation for each tenor.
Questions
Why does this formula divide days by 360 instead of 365?
Because interbank money-market deposits — the rates that actually feed a forward quote — are conventionally quoted on an Act/360 basis for most major currencies, including the US dollar and the euro. Using 360 in the denominator matches how a bank's own money-market desk computes the day-count fraction; swapping in 365 understates that fraction slightly and shifts the forward rate a few hundredths of a percent off a live quote.
Does every currency use the Act/360 day-count?
No — sterling money-market deposits are the well-known exception, traditionally quoted on an Act/365 basis rather than Act/360. Plugging a GBP rate into this formula without adjusting for that convention introduces a small, systematic error; currencies like the US dollar, the euro, and the Japanese yen follow Act/360 and need no adjustment.
How is this different from a plain annual forward-rate formula?
A formula with no day-count term implicitly assumes the forward sits exactly one year out, which real contracts rarely do — dealers quote forwards for specific dates, commonly 30, 60, 90, or 180 days ahead. The Days to forward date field here lets the rate differential apply only for the fraction of a year the money is actually tied up, matching how a bank prices an actual dated contract.
Who prices a forward this way instead of just asking a bank for a quote?
Corporate treasurers checking a bank's quoted forward against the textbook money-market figure before signing a hedge, and FX forward desks building a curve of rates across multiple settlement dates, both start from this same three-rate, one-date calculation. It is the reference price a dealt forward gets measured against, not a replacement for dealing one.
What happens when the domestic and foreign rates are equal?
The forward rate equals the spot rate exactly, because the two day-count factors in the formula cancel out. At a 1.10 spot with both rates set to 3% over 90 days, the instrument returns 1.10 unchanged — interest rate parity only pulls the forward away from spot when the two rates actually differ from each other.
Why might my bank's forward quote differ from this figure?
This formula prices the no-arbitrage rate implied purely by the two deposit rates and the day count; a dealt quote also bakes in the bank's bid-ask spread, counterparty credit charges, and funding costs that have widened since the 2008 crisis into what traders call the cross-currency basis. Expect the two figures to sit close but rarely identical.
References
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.