What’s the forward point in currency?
Future points add or remove basis points from the current spot rate of a currency pair to produce the future rate for delivery on a specific date in currency trading. A forward premium adds points to the spot rate, whereas a forward discount is the subtraction of points. The forward rate comes from the difference in interest rates between two currencies (always two currencies) and the maturity date of the agreement.
Another term for forward points is the forward spread.
Basis points can increase or decrease spot rates. If they’re added, they’re forward points. Subtraction yields discount points.
Forward Point in Currency Fundamentals
Forward points determine the price of outright forward contracts and foreign money swaps. Calculate points and conduct transactions on any business day in both currencies. The U.S. dollar, euro, Japanese yen, British pound, and Swiss franc are the most traded future currencies.
Forwards typically last a year. Prices for future dates are available, although liquidity is often lower. The outright forward foreign exchange transaction involves buying one currency against another for delivery beyond the spot date. The spot rate plus or minus forward points to the value date is the price. Money does not change hands until the valuation date.
A foreign exchange swap involves buying a currency (typically a spot) and selling it back later. The forward leg of the swap uses the near-date rate plus or minus the far-date forward points. Money transfers hands on both valuation dates.
In contrast to the forward spread, the discount spread subtracts currency bold points from the spot rate to get a currency’s forward rate. In currency markets, forward spreads, or projections, are two-way quotations with bid and offer prices. Discount spreads have greater bids than offers, whereas premium spreads have lower bids.
Examples of Forward Points in Currency
Quotes for forward points include +13.2 or -270.68. These signify 1/10,000; therefore, +13.2 adds 0.00132 to a currency spot price.
For instance, if the spot euro-dollar rate is 1.1350 and forward points are +13.2, the future rate is 1.13632 (or 1.1350 + 0.00132).
We might conclude that U.S. interest rates are more significant than Eurozone rates. Positive forward points indicate that the EUR/USD rate will rise as we move forward. This is because bold points offset the currency interest rate differential.
If the euro interest rate is 1% and the U.S. rate is 2%, keeping dollars instead of euros would make the 1% difference. Consider this while negotiating future money exchange rates (forward rate).
- To calculate the forward rate for delivery on a specific date, currency traders add or subtract basis points from the current spot rate of a currency pair.
- To get a currency forward rate, subtract the spot rate from the currency’s bold points or discount spread.
- Adding points to the spot rate is a forward premium; subtracting them is a forward discount.