How Interest Rates Affect FX Forward Quotes

Summary

The document explains how to think about intraday trading in currency forwards by relating a forward quote to the spot exchange rate and the cost of carry. It describes the forward as exposure to the underlying currency pair, adjusted for the interest-rate difference between the domestic and foreign currencies over the contract’s maturity.

For a EUR/USD example, it states that a rise in spot tends to raise the forward quote. Holding other factors constant, a rise in USD rates raises the forward, while a rise in EUR rates lowers it. These directional relationships follow from the quoted currency convention and the carry adjustment. The discussion is brief: it gives no empirical study, trading signals, data, or guidance on execution and risk, and it does not provide a full cost-of-carry formula. Its statements should therefore be applied with attention to quote convention, maturity, and changing market conditions.

Key ideas

• An FX forward quote reflects spot plus a maturity-specific carry adjustment.
• The carry adjustment depends on the interest rates of both currencies.
• For the stated EUR/USD convention, higher USD rates raise the forward quote, all else equal.
• The document gives directional relationships but no empirical evidence or intraday trading method.

Tags

# Basic FX-Forwards trading Guide


# Basic FX-Forwards trading Guide












What fundamentals or other factors should one follow to trade currency Forwards intraday?

## Answer by Pecos (score 1)

https://quant.stackexchange.com/a/46546

Basically trading a forward contract is like trading the underlying currencies, you just have to factor in the foreign and domestic interest rates. For example, say you are trading a EURUSD forward. You just add the cost of carry (CoC) for that maturity to the current spot rate and you have the forward rate (you can find the cost of carry formula in like 2 seconds on the internet). What you would see from the CoC formula is that if EURUSD rises, the forward rises, if USD rates rise (all else being equal) the value of your forward rises and if EUR rates rise (all else being equal) the value of your forward will fall.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.