Currency Hedging Calculator

Compare forward contract and option hedging costs using covered interest rate parity. Calculate forward rates, hedge costs, and breakeven exchange rates.

Inputs

Notional Amount (Foreign Ccy)

Spot Exchange Rate

Domestic Interest Rate (%)

Foreign Interest Rate (%)

Hedge Horizon (Months)

Expected Future Spot Rate

Option Premium (%)

Hedge Ratio (%)

Tab to move between fields

Results

Forward Exchange Rate

1.11

Forward Points0.01

Forward Premium/Discount (%)0.99%

Annualized Premium (%)1.97%

Forward Hedge Cost ($)$10,837.44

Option Premium ($)$20,000.00

Hedged Portfolio Value ($)$1,110,837.44

Hedging Gain/Loss ($)$60,837.44

Breakeven Rate1.11

Cost Savings (Cheaper Method)$9,162.56

Cheaper MethodForward

How to Use This Calculator

Enter Notional Amount (Foreign Ccy), Spot Exchange Rate, and Domestic Interest Rate (%).
Set Foreign Interest Rate (%), Hedge Horizon (Months), and Expected Future Spot Rate.
Adjust Option Premium (%), Hedge Ratio (%) as needed.
Review the Forward Exchange Rate result.
Use Forward Points and Forward Premium/Discount (%) (%) to inform your decision.

How the result changes with Spot Exchange Rate

Spot Exchange Rate	Forward Exchange Rate
1,000	1,009.85
3,500	3,534.48
6,500	6,564.04
9,000	9,088.67

What each input means

Notional Amount (Foreign Ccy): Foreign currency amount to hedge.
Spot Exchange Rate: Current spot rate (domestic per foreign unit).
Domestic Interest Rate (%): Annualized domestic risk-free interest rate.
Foreign Interest Rate (%): Annualized foreign risk-free interest rate.
Hedge Horizon (Months): Duration of the hedge contract in months.
Expected Future Spot Rate: Your forecast of the spot rate at hedge maturity.
Option Premium (%): Cost of an FX option as a percentage of notional.
Hedge Ratio (%): Percentage of the exposure to hedge.

What each result means

Forward Exchange Rate: Theoretical forward rate from interest rate parity.
Forward Points: Difference between forward and spot rate.
Forward Premium/Discount (%): Forward premium (+) or discount (-) vs spot.
Annualized Premium (%): Forward premium annualized for comparison.
Forward Hedge Cost ($): Absolute cost of forward points on the hedged notional.
Option Premium ($): Upfront option premium cost.
Hedged Portfolio Value ($): Total value combining hedged and unhedged portions.
Hedging Gain/Loss ($): Gain or loss from hedging vs staying fully unhedged.
Breakeven Rate: Spot rate at which hedging neither gains nor loses.
Cost Savings (Cheaper Method): Dollar savings from using the cheaper hedging method.

How this is calculated

Worked example, using the default values

Identify Input Parameters
4 parameters
Notional Amount (Foreign Ccy) = 1000000, Spot Exchange Rate = 1.1, Domestic Interest Rate (%) = 5, Foreign Interest Rate (%) = 3 = 8 input(s) provided
Calculate Forward Exchange Rate
Forward Exchange Rate = spotRate * (1 + (domesticRatePct / 100) * T) / (1 + (foreignRatePct / 100) * T)
1.1108 = 1.1108
Calculate Forward Points
Forward Points = forwardRate - spotRate
0.0108 = 0.0108
Calculate Forward Premium/Discount
Forward Premium/Discount = (forwardPoints / spotRate) * 100
0.99 = 0.99%