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FX Forward Hedge Cost Calculator

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Understanding the FX forward hedge cost — concept and principle

A currency forward lets a business lock in today the exchange rate it will pay for a foreign-currency amount at a future date. This calculator shows what that lock-in costs compared with today's spot rate, compares it with where you expect the spot rate to be, and expresses the forward premium as an approximate annual percentage. Importers and exporters use it to judge whether hedging is worth it. Rates are entered as units of your currency per one unit of foreign currency; results are in your currency (USD by default).

FX forward hedge costBuying 100,000 foreign units costs $110,000 at today's spot of 1.10. A forward at 1.115 fixes the cost at $111,500, a $1,500 premium. If spot ends at the expected 1.12 ($112,000), the forward is $500 cheaper.Buying 100,000 foreign units in 6 monthsSpot today1.10 → $110,000Forward, fixed now1.115 → $111,500Your expected spot1.12 → $112,000+$1,500premium−$500vs expectedPremium ≈ 2.73% a year, about the interest-rate gapThe forward removes uncertainty; it beats spotonly if the rate really ends above 1.115
Compare the fixed forward cost with where you expect spot to be; the outcome is not known in advance.

How it is calculated

A positive "cost vs expected spot" means the forward is more expensive than you expect the market to be; a negative value means the forward looks cheaper.

The principle

A forward rate is not a forecast. Banks set it from the spot rate and the interest-rate gap between the two currencies, a relationship called covered interest rate parity: forward ≈ spot × (1 + domestic rate × t) ÷ (1 + foreign rate × t). If your currency's interest rate is higher, the foreign currency trades at a forward premium; if it is lower, at a discount. Otherwise traders could borrow in one currency, invest in the other and lock in a risk-free profit.

Worked example

  1. Forward premium = 100,000 × (1.115 − 1.10) = $1,500.00; the forward fixes your cost at $111,500.
  2. Annualised over the 6-month tenor = (1.115 ÷ 1.10 − 1) × 12 ÷ 6 = 2.73%, roughly the interest-rate gap between the two currencies.
  3. Against your expected spot of 1.12: 100,000 × (1.115 − 1.12) = −$500.00.
  4. If your expectation is right, the forward saves $500 compared with buying later at spot.

How to read the result

The main value of a forward is certainty: you know your cost today, which protects budgets and margins. The "cost vs expected spot" figure is only as reliable as your forecast, and exchange rates are notoriously hard to predict. Many firms hedge part of their exposure rather than all of it.

Common mistakes

Keep in mind: This is a simplified comparison. It ignores bank margins, credit terms, settlement details and accounting treatment. It is not financial or investment advice; talk to your bank or a qualified adviser before hedging.

FAQ

Frequently asked questions

Can I cancel a forward if I no longer need the currency?

Usually you must close it out with an offsetting trade, which can produce a gain or a loss depending on how rates have moved.

Is a forward the same as an option?

No. A forward obliges you to exchange at the fixed rate. An option gives you the right but not the obligation, and you pay a premium for it.

Sources: Hull, J. C. — Options, Futures, and Other Derivatives (Pearson) · Bank for International Settlements — Triennial Central Bank Survey of foreign exchange markets

Checked 8 Nov 2026. Standard business and finance formulas. Estimates for information only.

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