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Implied Interest Rates from FX Non-Deliverable Forwards (NDFs)

lushukai

Active Member
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Dear Turtles,

Seeking help on a general question (that looks most likely to be linked to this topic) about implied interest rates based on FX NDFs. If you don't know what an FX NDF is, its basically a cash settled fx forward without the need to exchange the notional - sort of like an OTC bet on where the exchange rate goes to (in the future) between two parties.

According to Investopedia: investopedia.com/terms/i/impliedrate.asp
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Currencies

If the spot rate for the euro is $1.2291 and the one-year futures price for the euro is $1.2655, the implied interest rate is:

Implied rate = (1.2655 / 1.2291)(1/1) - 1 = 2.96% (annualized)

Calculate the ratio of the forward price over the spot price by dividing 1.2655 by 1.2291. Since this is a one-year forward contract, the ratio is simply raised to the power of 1. Subtracting 1 from the ratio of the forward price over the spot price results in an implied interest rate of 2.96%.
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The formula for the implied interest rate is given as such. My question is, would the implied interest rate be for Europe or the US? Thank you for any help offered!
 
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