The Forward Currency rate is a rate that a currency will trade for at a future date and is determined by the short-term interest rates in the 2 countries whose Exchange Rate is being determined. Traders use these interest rates to calculate the price at which a currency will be traded on a future date. It is a derivative contract of the underlying currency which suggests the direction of a currency in the future. French academic Peir Sercu suggests that fundamental indicators are poor predictors of future Exchange Rates and that the forward rate is the best predictor of future Exchange Rates because it efficiently captures market sentiment; International Finance, 2009, p. 385, 428. Foreign currency investors sell their domestic currency to purchase foreign currency, so they incur interest expenses at the domestic rate on the currency they sell and receive interest on the foreign currency they hold.
