Question

Why can we use forward rate for the forecast at the rate of future?

How interest rate impact to exchange rate?

Answer 1

FORWARD RATE:- A forward rate is an interest rate applicable to financial transaction that will take place in the future. i may also refer to the rate fixed for a future financial obligation.

such as the interest payment on loan taken.

forward rates tell us very little about where the actual rate will be. This result is not too surprising and reflects the fact that financial market prices can be volatile and hence difficult to predict, particularly over the short term.

forward exchange rates, however, do not look like average market expectations. Over the past nine years, forward exchange rates have nearly always priced in a depreciation of the future exchange rate

The forward market allows investors, firms, and individuals to avoid the uncertainty associated with changes in financial market prices. For example, the forward exchange rate market provides a way for exporters and importers to protect themselves against exchange rate risk.

interest rate impact on exchanges rate

while exchange rate subjected to impact from interest rate, The theory is that when there is more, or cheaper, money perceived to be available in the economy through bank loans and other types of credit, consumers and businesses will spend more, sellers of goods and services will adjust prices upward, and inflation can accelerate.

interest rates are also considered to have their own particular relevance for foreign exchange trading because of what is known as interest rate parity..

• domestic interest rates raise the demand for deposits, and, hence, the money base.
• firms need bank loans to finance the wage bill, which reduces output when domestic interest rates increase
• higher interest rates raise the government's fiscal burden, and, therefore, can lead to higher expected inflation