Currency Hedging Calculator

Locking in a future exchange rate has a price, and this calculator derives that price two different ways so you can compare them directly. The forward rate is computed from covered interest rate parity — F = S × (1 + r_domestic × T) / (1 + r_foreign × T) — which says the forward rate must adjust for the interest-rate gap between the two currencies so that no risk-free arbitrage is possible between holding cash in one currency versus the other over the hedge horizon. The gap between that forward rate and today's spot rate ("forward points") tells you whether the currency is trading at a forward premium or discount, and the calculator annualizes that gap so hedges of different lengths can be compared on equal footing.

Applying your hedge ratio splits the notional into a hedged portion valued at the locked-in forward rate and an unhedged portion left exposed to your own forecast of the future spot rate, then compares that blended outcome against staying fully unhedged to show the hedging gain or loss. Alongside the forward, the calculator estimates an option hedge as a straightforward percentage-of-notional premium — a simplification of real options pricing (which depends on volatility, strike, and time in a Black-Scholes-style model) rather than a market quote — and flags whichever of the two costs less for this notional and horizon. Two caveats worth knowing: the "breakeven rate" collapses to the forward rate whenever the hedge ratio is 100%, and interest rate parity assumes frictionless capital markets, so real-world forward quotes from a bank will include a credit and liquidity spread on top of what the parity formula produces here.