Forex Hedging Cost Comparison Tool

This table shows a comparison summary of carry spot vs. forward contract rates for the amounts you entered above. See the Hedge Cost Comparison Breakdown table below for details on how these amounts are calculated.

The Interest Rate Safety Margin field shows the amount interest rates would need to change unfavorably, immediately and for the entire timeframe, to make the carry spot hedge less attractive than the forward contract estimate.

This table shows the currency pair trade(s) required to complete the hedge on the OANDA FXTrade platform. (If it's a synthetic pair, two or more trades are required.) Depending on the asset/liability you are hedging, you either buy (go long) or sell (go short) the first currency in the pair.

The buy and sell rates shown are the OANDA FXTrade rates at the time of calculation, and were used to calculate both the carry spot and forward contract estimates. Forex rates change constantly, so you should update the rates often. (To see the latest rates, click the Refresh Rates at the top of this page.)

When you open a carry spot trade, you are simultaneously buying one currency and selling another. The carry spot hedge cost is based on:

1. The current exchange rate spread (see the Estimated Spread Cost Breakdown table below)
2. The interest carry costs (see the Interest Carry Cost Breakdown table below).

The forward rate is priced based on factors such as the following:

1. the current exchange rate spread, (see the Estimated Spread Cost Breakdown table below)
2. the interest carry costs (see the Interest Carry Cost Breakdown table below)
3. a cost to cover potential negative changes to the interest carry costs (see the Interest Risk Cost Breakdown table below)
4. a flexible built-in commission for the forward contract provider (estimated at $250, although the actual commission may be lower or higher).

Note that this tool provides an estimate only. The forward rates you end up paying will be different from this estimate. Actual forward transaction costs and commissions depend on specific circumstances (length of contract period, customer size, customer knowledge, provider's risk appetite, provider's required profit per transaction, provider's exposure to particular currencies, and so on).

The spread is the difference between the bid price (the price you sell at) and the ask price (the price you buy at), quoted in pips. A pip is 1/100 of one percent.

For example, if the quote between EUR/USD at a given moment is 1.5222/1.5223 (sell vs. buy, sometimes expressed as 1.5222/223), then the spread is 1 pip. If the quote is 1.5222/1.5242, then the spread is 20 pips.

The foreign currency rates and spreads are sourced from OANDA’s FXTrade platform. These spreads tend to be standard amounts, except for those times when market liquidity just isn't available (for example, during market events or weekends).

If the forex hedge is between two currencies not traded as a pair on the OANDA FXTrade platform, then the spread is calculated as a synthetic spread, an aggregate of the spreads from two or more currency pairs. For example, if the forex hedge is between the Danish Kroner (DEK) and the Singapore Dollar (SGD), the synthetic spread would include the spreads from both the USD/DEK and USD/SGD pairs.

The interest carry cost is the difference between the interest paid on the currency sold and the interest earned on the currency purchased during the time the carry spot trade is open.

Each forex hedge has different interest rates associated with it, depending on the currencies involved. You receive interest on the currency you purchase (long), and must pay interest on the currency you sell (short). The difference in these amounts is the carry or interest differential, sometimes referred to as the cost of carry.

All foreign currency transactions that settle in the future (such as futures, forwards and exotics) will have the interest differential cost built into the forward rate. For this example, the interest rate charged/earned is the current interest rate charged by OANDA’s FXTrade. These rates are assumed to be constant throughout the life of the forex hedge (but of course are subject to change at any time).

Each currency has two interest rates at any time: one interest rate paid out when the currency is purchased and a higher rate charged when the currency is sold.

Interest risk premium is a variable amount charged by the issuing party for potential changes in interest rates which would impact the interest carry costs for fixed-priced forex contracts that settle in the future. It is based on the contract’s length and a current assessment of potential interest rate movements in the market. For simplicity, this model uses the following interest risk premium assumptions:

When you enter into a carry spot trade for hedging, there is a risk that the interest rates on any of the currencies involved could change unfavorably and increase your cost. This is the most substantial unknown for carry spot hedging and is a risk that is already factored into forward contract pricing.

The interest rate change in this field represents the amount interest rates would need to change unfavorably, immediately and for the entire timeframe, to make the carry spot hedge less attractive than the forward contract estimate. For example, the interest rate on the sold currency would need to increase by the noted amount, or the interest rate on the bought currency would need to fall by this amount, or a combination of these two scenarios.