What Are Forward Points?

In currency trading, forward points are the number of basis points added to or subtracted from the current 澳洲幸运5官方开奖结果体彩网:spot rate of a currency pair to determine the forward r🏅ate for delivery on a specific value date. When points are added to the spot rate this is called a forward premium; w💎hen points are subtracted from the spot rate it is a forward discount.

The 澳洲幸运5官方开奖结果体彩网:forward rate is based on the difference between the interest rates of the two currencies (currency deals always involve two currencies) and the time until the maturity of the deal. Forward points are also known as the 澳洲幸运5官方开奖结果体彩网:forward spread.

Basis points c🔥an be either added or taken away from the spot rate. If they are added, they are forward points. If subtracted, they are discount points.

Understanding Forward Points

Forward points are used to calculate the price for both an outright 澳洲幸运5官方开奖结果体彩网:forward contract and a 澳洲幸运5官方开奖结果体彩网:foreign currency swap. Points can be calculated and transactions executed for any date that is a valid business day in both currencies. The most commonly traded forward currencies are the U.S. dollar, the euro, 🅰the Japanese yen, the British pound, and the Swiss franc.

Forwards are most commonly done for periods of up to one year. Prices for further out dates are available, but 澳洲幸运5官方开奖结果体彩网:liquidity is generally lower. In an 澳洲幸运5官方开奖结果体🅘彩网:outright forward foreign excﷺhange contract, one currency is bought against another for delivery on any date beyond the spot. The price is the spot rate plus or minus the forward points to the value date. No money changes hands until the 澳洲幸运5官方开奖结果体彩网:value date.

In a foreign exchange swap, a currency is bought for the near date (usually spot) against another currency, and the same amount is sold back for the forward date. The rate for the forward leg of the swap is the near-date rate plus or minus the forward points ꦆto the far date. Money changes hands on both value dates.

Discount Spreads

In contrast to the forward spread, a discount spread is the currency forward points&🀅nbsp;that are subtracted from the spot rate, to obtain a forward rate for a currency. In the currency markets, forward spreads, or points, are presented aಞs two-way quotes; that is, they have a bid price and an offer price. In a discount spread, the bid price will be higher than the offer price, while in a premium spread, the bid price will be lower than the offer price.

Examples of Forward Points

Forward points are often quoted in numbers, such as +13.2 or minus -270.68. These represent 1/10,000, so +13.2 means 0.00132 when added to a currency spot price. 

For example, if the euro can be bought versus the dollar at the rate of 1.1350 for spot, and the forward points are +13.2, the forward rate is 1.13632 (or 1.1350 + 0.00132).

Based on this information we can determine that the interest rate in the U.S. is higher than that in t🍬he Eurozone. The positive forward points when buying the EUR/USD tell us that the rate goes up the further out into the future we go. This is because t🔯he forward points compensate for the difference in interest rates between the two currencies.

Expressed a different way, if the euro inter♌est rate is 1% and the U.S. interest rate is 2%, a trader could make a 1% difference by holding U.S. dollars instead of euros. So when exchanging or locking in currency exchange ra🅰tes for the future (forward rate) this needs to be factored in. 

The Bottom Line

Forward points, or swap points, measure the difference between the current spot price of a currency pair and the price when the deal matures. If forward points are added, the trader expects to earn interest; if they are subtracted, the trader expects to pay interest.