What is the major difference between Spot rate & Forward rate

[Thecodont]

one is for settlement now and the other settles in the future. The difference is the risk free rate over the period

 

[ohai]

The risk free rate does not explain all the differences. For stocks, dividends must be considered. For commodities, storage cost, convenience yield, and seasonality will affect forward prices. For currencies, different interest rates will result in different forward prices. And for any forward trading thing, supply and demand can cause forward prices to deviate from what is predicted by all the above.

 

[bartender]

I dont think your answer is correct thecondont…
Spot rates are for a period of time starting today.
Forward rates are for a period of time that starts at some point in time in the future (not today)

 

[Thecodont]

bartender wrote:
I dont think your answer is correct thecondont…
Spot rates are for a period of time starting today.
Forward rates are for a period of time that starts at some point in time in the future (not today)

That is what i said. A spot is the setttlemnt price for today. The forward contact at its simpiest term is the no arb price that does not allow for riskless profits. The simplist equation would be Forward = Spot (1+ RFR)^T

 

[nitish3861]

Thanks to all

 

[Alpha-and-Omega]

Thought it might be worth noting that forward rates can also be used to gauge market consensus for future spot rates. I.e. for currency if the current EUR/USD spot is 1.2 and the 3-mo forward rate is 1.35 then you could say that the market expects USD to depreciate against the EUR (because it takes more USD to buy EUR in the forward market).