Forward points explained
What forward points are
Forward points mark the difference between today’s spot exchange rate and the forward exchange rate set for a future date. Think of the spot rate as the current market price to exchange currencies straight away. When you agree a forward contract, you lock in a rate today for settlement sometime later. That forward rate isn’t just the spot rate carried forward, it’s adjusted by these forward points, which are typically tiny fractions of the whole rate.
They don’t tell you where the exchange rate is headed. Instead, what you see comes from interest rates in each currency. This means the forward price reflects what it costs to hold each currency for the period in question, right up to the day you settle. Forward points come into play when you lock in a future exchange rate with a forward contract.
Why interest rate differences create them
Interest rates sit at the heart of forward points. Whenever one currency pays more interest than the other, it’s usually priced lower on a future date compared to the spot rate, that’s called trading at a forward discount. On the other hand, a currency with a lower interest rate tends to show as a forward premium. The wider the gap and the longer the contract, the more pronounced the difference between forward and spot.
Every time central banks shift rates, forward points change right along with them. When you see a quote from a provider, those points are there, combined with any margin the provider adds for its own costs or business model.
Reading forward points in a quote
Forward points appear as numbers you add to (or subtract from) the spot rate. Positive points make the forward rate higher; negative points make it lower. Most providers display the breakdown, so you can see exactly how the forward rate is built up compared to the spot rate.
No matter the type or size of your forward contract, the points apply for every trade settling on that date. It's important to compare the final all-in forward rate with your budget exchange rate, not just with today's spot figure. Before booking, ask for the provider’s written quote showing the spot rate, the points and the combined rate.
Suppose a euro-based company receives dollars
Say you run a euro-based company set to receive 100,000 US dollars in six months. Today’s spot rate is 1.10 dollars per euro, but the six-month forward rate quotes at 1.12 after including forward points. If you were to convert right now, you’d receive about 90,909 euros. If you book the forward, you’d get about 89,286 euros, so around 1,600 euros less due to the dollar’s forward discount. That’s because the dollar, in this example, has a higher interest rate. These amounts are for illustration only.
Frequently asked questions
Do forward points show where a currency is heading?
No. Forward points represent only the interest rate gap between two currencies and the cost of holding one over the other until settlement. They’re not a prediction. The market could easily go another way, leaving the final spot rate far from the forward rate you agreed.
Why do forward rates change when spot does not?
Forward rates depend on more than just the spot rate, they respond to interest rates as well. If either currency’s interest rate changes, the forward points will shift, sometimes even if spot stands still. Points can also move if the settlement period changes, so check the provider’s quote for your specific contract date. If your payment date isn’t set, you might want to read about window forward contracts.