What is the difference between a ‘spot rate’ and a ‘forward rate’?

The spot rate and the forward rate differ in terms of timing, calculation, and application:

Timing
The spot rate applies to immediate transactions, while the forward rate is used for future transactions, typically settled more than two business days ahead.

Calculation
The spot rate is determined by supply and demand in the foreign exchange market. In contrast, the forward rate is calculated based on the spot rate and the expected interest rate differential between the two currencies.

Application
The spot rate is mainly used for instant currency conversions, international trade settlements, and day-to-day transactions. The forward rate is mainly used for hedging currency risks and planning future financial obligations.