In terms of currency valuation, what is meant by 'forward rates'?

The concept of 'forward rates' in currency valuation refers to the expected future exchange rate between two currencies. Forward rates are determined in the foreign exchange market and are used to lock in an exchange rate for a currency transaction that will occur at a future date. This mechanism allows businesses and investors to hedge against potential fluctuations in currency values, providing a strategy to mitigate risk associated with currency investments and transactions.

Forward rates are derived from the current spot exchange rate, adjusted for interest rate differentials between the two currencies involved. Investors rely on these rates to make informed decisions regarding future currency purchases or sales, aiding in planning and budgeting. Therefore, the essence of a forward rate lies in its predictive nature regarding currency value, which is why the correct answer aligns with the definition of an expected future exchange rate.