Forward points are the difference between the outright and spot
Table of Contents
1. Summary
Forward points are the difference between the forward rate and spot, stated in pips. A forward above spot is at a premium and has positive points. A forward below spot is at a discount and has negative points.
2. Detail
With \(S\) and \(F\) in quote currency per unit of base currency:
\[F = S + \text{points} \times \text{pip factor}\]
By Covered Interest Parity and FX Forward Pricing, \(F > S\) when the quote currency has the higher interest rate, and \(F < S\) when it has the lower one.
Parity gives a theoretical value. Dealer quotes also hold the cross-currency basis, funding and liquidity conditions, the bid-ask spread and credit adjustments.
Parity with positive inputs always gives a positive forward, even when a rate is negative and a discount factor exceeds one.
3. See also
- FX forwards — the structure note.
- Pip, tick size, and pip factor — completes: the unit of the points.
- Forward points follow from two money market rates — completes: how points follow from rates.
- Short-date swap points run between their own two value dates — completes: the short-date case.