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Forward Pricing – Interest Rate Parity and the Forward Curve
Why does a three-month EUR/USD forward trade at 1.0825 when spot is 1.0850? The answer isn't a forecast. It's mathematics.Episode 10 takes on the pricing engine behind every forward contract in the FX market. David Axtell walks through Covered Interest Rate Parity — the no-arbitrage relationship linking currency markets with money markets — and explains why forward rates are determined by interest rate differentials, not by anyone's view on where the exchange rate is heading.He starts with the intuition: two investment strategies — a direct dollar deposit versus converting to euros, investing…
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