Implied Rate
Candlefocus EditorThe spot rate is the current price of a security and the forward or futures rate is the expected future rate. The implied rate is calculated by subtracting the current spot rate from the future forward rate and can be seen as an indication of the expected return on an investment.
When an investor has a portfolio of investments, the implied rate can provide them with insight into how well their portfolio is performing. By factoring in the expected future cost of money, the implied rate can provide an accurate measure of returns across a portfolio. An implied rate is also useful for investors who are looking to diversify their investments; they can compare the expected return of different securities in order to make an informed decision.
Furthermore, the implied rate can be used to predict future market behaviour. If the forward rate is higher than the spot rate, then this may indicate that the market expects an increase in the future cost of money. Conversely, if the forward rate is lower than the spot rate, then this might indicate that the market expects a decrease in the future cost of money. By calculating the implied rate, investors can gain insight into the expected future performance of a security.
In conclusion, the implied rate is an important concept for investors as it enables them to accurately predict the future return of their investments. It provides investors with a way to compare returns across different investments and can be used to gain insight into future market behaviour. By calculating the implied rate, investors have a greater chance of success in their investments.