Forward Rates Explained

So just what is a forward rate then? Well, this refers to a rate of interest that is agreed today for a deposit from one date in the FUTURE to another, or indeed in the same way not for a deposit but a borrowing of some sort.

Why do people use forward rates?

Well, simply because they are very useful sa they let you lock into rates today for tomorrow which avoids the risk and uncertainty of interest rate movements badly affecting you between now and the date of deposit or date of borrowing.

Of course the market rate might improve and be better than the locked in rates, but the whole point is that you are avoiding risk by locking in at certain rates which means less potential guesswork with your figures.

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