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How do interest rates enter in the determination of the forward exchange rate?

How do interest rates enter in the determination of the forward exchange rate?

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Answer #1

The Forward Exchange Rate is the Exchange Rate at which a Bank agrees to exchange one currency for another at a Future Date when it enters into a Forward Contract with the Investor.

The Forward exchange rate depends on three known variables that is the spot exchange rate, the domestic interest rate and the foreign interest rate. This effectively means that the forward exchange rate is the price of a forward contract which derives its value from the pricing of contracts and the addition of information on available interest rates.

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