Forward rate
The rate at which locking money away for longer ties exactly with rolling a shorter position. A breakeven computed from today's prices, not a prediction.
Where you will meet it
Forward rate appears in 21 learning outcomes on the CFA syllabus. A few of them:
- Tell apart the spot curve, the par curve and the forward curve
“When the spot curve slopes upward the par curve lies below it and the forward curve above it, because each forward rate must be high enough to pull the average up.”
- Explain cash flow additivity and apply it to derive an implied forward rate
“Applied to interest rates, investing for two years at the two-year spot rate must equal investing for one year and rolling over at the implied forward rate: (1 + S2)² = (1 + S1) x (1 + f).”
- Explain how the rate on an interest rate forward contract is fixed
“An interest rate forward, or forward rate agreement, fixes today a rate that will apply to a future period on a notional principal.”
- Read and explain quotes for spot and forward exchange rates
“A forward rate is not a forecast — it is the spot rate adjusted for the interest rate differential, because otherwise borrowing in one currency and lending in the other would be free money.”
Learn it properly
Practise it
Practise forward rate until it is automatic: questions that explain every wrong option.
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