Spot and Forward Exchange Rates Explained in 5 Minutes

Spot and Forward Exchange Rates Explained in 5 Minutes by Ryan O'Connell, CFA, FRM

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Chapters:
0:00 - Spot Exchange Rates
0:30 - Forward Exchange Rates and Forward Contracts
1:22 - Interest Rate Parity Formula
2:18 - Solving for the Forward Exchange Rate
4:01 - Interest Rate Parity Explained

*Disclosure: This is not financial advice and should not be taken as such. The information contained in this video is an opinion. Some of the information could be wrong. This channel is owned and operated by Portfolio Constructs LLC. Some of the links above are affiliate links, meaning, at no additional cost to you, I will earn a commission if you click through and make a purchase.

[RyanOConnellCFA]

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[kahowan]

Hello, Ryan. Thank you so much for the video! There is one question troubling me for a long time.
For the EUR/USD 1.40 to 1.47 case, could you elaborate more on why the higher interest rate in USD would lead to dollar depreciates please?
Because in my knowledge, if EUR/USD is 1:1, EUR interest rate is 0 while USD interest rate is 10%, the forward EUR/USD rate should be:
spot*(1+interest rate of base)/(1+interest rate of price ccy) which is 1*(1+0)/1.1 so EUR/USD would be 0.91. The 0.91 makes more sense to me as the higher interest rate in USD would lead to USD appreciate while EUR depreciates

[dantepreston]

Great video and awesome explanation. Why is the Euro the base currency? I thought the domestic would be the base?

[nasryanas]

Are these loan or borrow interest rates?

[holio]

Do i have ownership when i trade fx spot market contract

[erlsonarreola]

Hi Ryan. Since USD/EUR 1.4 is the same as EUR/USD .7143, how do I know if I'm using the correct spot rate? The formula is very easy to remember but when it comes to which rate I'll be using (i.e. USD/EUR 1.4 or EUR/USD .7143), that's when I get confused a lot.

[andreatorri]

Where can I find the forward exchange rate?

[deanmcc]

Hey mate, I'm not understanding why a currency offering a higher rate of return would lead to a depreciating currency? Wouldn't that mean that more investors invest in the currency offering the higher rate of return => increasing it's price and therefore appreciating the currency?

[joeldavies]

Hi Ryan, I am confused at the 'interest rates' you refer to. Are these the central banks' base rates you are referring to? In addition to this, the forward rate (in your example $1.40 spot and $1.47 forward) the 1.47 is what you end up paying with a premium included?

[noutubenamesleft]

Im sorry, was with you until “we have to multiply both sides” not sure what is multiplying what.

[davidlebeau]

you making a mistake IMHO. the USD cant be worth less in the future if it paying higher interest than the EUR, ceteris paribus.