What This Tool Is Actually Comparing
Imagine you know today that you'll receive (or need to pay) a fixed amount in a foreign currency at a specific date in the future — an exporter waiting on a customer payment, or an importer who owes a supplier. You have two broad choices: lock in today's forward rate with your bank for that future date (hedged), or wait and convert at whatever the spot rate happens to be when the money actually changes hands (unhedged). This calculator lets you test the second option against a specific rate you think might occur, so you can see the dollar difference between the two paths under that one assumption.
The Four Numbers Behind the Comparison
- Hedged Value = Exposure × Forward Rate. This is locked in today and guaranteed regardless of what actually happens to the exchange rate later.
- Unhedged Value (Scenario) = Exposure × Expected Future Spot Rate. This is what you'd get if you waited and the rate landed exactly where your scenario guesses.
- Hedging Gain/Loss = Hedged Value − Unhedged Value (Scenario). Positive means the forward contract outperformed your guessed scenario; negative means the guessed scenario would have outperformed the hedge.
- Forward vs. Spot Premium/Discount % = (Forward − Spot) ÷ Spot × 100. This tells you, independent of any scenario, whether your bank's forward rate already builds in a premium or a discount versus today's spot rate — a function mainly of the interest rate gap between the two currencies.
Worked Example
You're expecting to receive €100,000 in six months. Today's spot rate is 1.10 (home currency per euro), and your bank offers a forward rate of 1.12 for a six-month contract. You think the euro might weaken and guess a future spot rate of 1.05 to stress-test that possibility.
- Hedged Value = 100,000 × 1.12 = $112,000, locked in today no matter what happens.
- Unhedged Value (scenario) = 100,000 × 1.05 = $105,000, if your guess turns out to be right.
- Hedging Gain/Loss = $112,000 − $105,000 = +$7,000 in favor of hedging, under this specific scenario.
- Forward vs. Spot = (1.12 − 1.10) ÷ 1.10 × 100 ≈ +1.82%, so the forward is at a premium to spot.
Change the scenario rate to something above 1.12 instead, and the sign flips — the comparison has no opinion about which future is more likely; it only tells you the consequence of each one.
Frequently Asked Questions
Q: Isn't this just predicting the future exchange rate?
A: No, and that distinction matters. You supply the future rate as an assumption to test, not something the calculator derives or forecasts. The value of the tool is in showing you the payoff of hedging versus not hedging under a rate you specify, so you can repeat it for several plausible scenarios rather than betting everything on one outcome.
Q: Why would the forward rate differ from today's spot rate at all?
A: Forward rates are set mainly by the interest rate differential between the two currencies (covered interest rate parity), not by anyone's prediction of future spot rates. A currency with a higher interest rate typically trades at a forward discount, and one with a lower interest rate typically trades at a forward premium.
Q: What if I don't hedge and the actual rate differs from every scenario I tested?
A: Then your real outcome will differ from all of them too — that's the fundamental risk of staying unhedged. The forward contract's value, by contrast, does not depend on the actual outcome at all, which is precisely why it's used to remove that uncertainty.
Disclaimer: This calculator is for educational purposes only and does not constitute financial advice. It does not forecast currency movements; the "expected future spot rate" is a scenario you supply. Actual forward contract terms, credit requirements, and settlement details vary by bank. Always consult a qualified financial advisor before entering into a hedging arrangement.