2. INTRODUCTION
๏ถ In currency trading, forward points are the number of basis points
added or subtracted from the spot rate of a currency pair in order to
determine the forward rate on a specific future date.
๏ถThese points are based on the difference between the interest rates of
the two currency pairs.
๏ถ When points are added to the spot rate, it is called as forward
premium or forward points.
๏ถ When points are subtracted to the spot rate, it is called as forward
discount or discount points.
๏ถ Forward points are also known as the forward spread.
๏ถ The forward point quotations are for maturities of one week-30 years.
3. EXAMPLE
Assume the Swiss franc/ us dollar (SF/$) bid ask spread is
SF 0.9776 โ SF 0.9779 - Spot Rate
12 โ 10 - One - Month forward rate
39 โ 35 - three - Month forward rate
84 โ 78 - Six โ Month forward rate
4. Spot rate 0.9776 โ 0.9779
Forward time Forward point
quotations
Forward bid price Forward ask price Outright Forward
Quotations
One โ Month 12-10 0.9776 โ 0.0012 0.9779 โ 0.0010 0.9764 โ 0.9769
Three โ Month 39-35 0.9776 โ 0.0039 0.9779 โ 0.0039 0.9739 โ 0.9744
Six โ Month 84-78 0.9776 โ 0.0084 0.9779 โ 0.0078 0.9692 โ 0.9701
When the second number in a forward point โpairโ is smaller than
the first one, it is understood by the dealer that the forward points
are subtracted from the spot bid and ask price to get the outright
forward rates.
5. POINTS TO REMEMBER FOR OUTRIGHT
PRICES
๏ถ The dollar is trading at a forward discount / forward premium to the
Swiss franc.
๏ถ All the bid prices are smaller than the ask prices as they must be for a
trader willing to make a market.
๏ถ The bid โask spread increases with the increase in the time to maturity.
From the outright bid-ask spread we can see that as the maturity increases
the bid-ask spread also increases.
Spot bid-ask spread is 3 points i.e.; (0.9776-0.9779)
One month bid ask spread is 5 points i.e.; (0.9764-0.9769)
Three month bid-ask spread is 7 points i.e.; (0.9737- 0.9744)
Six month bid โask spread is 9 points i.e.; (0.9692-0.9701)
6. When the second number in a forward point โpairโ is bigger or larger
than the first one, it is understood by the dealer that the forward
points are added to the spot bid and ask price to get the outright
forward rates.
Bid- ask spread is applicable here too
Bid ask spread for three months and six months is 7 points and 9
points respectively which is increasing with the maturity time.
Spot rate 0.9776 โ 0.9779
Forward time Forward point
quotations
Forward bid price Forward ask price Outright Forward
Quotations
Three-Month 5-9 0.9776+0.0005 0.9779+0.0009 0.9781-0.9788
Six -Month 13-19 0.9776+0.0013 0.9779+0.0019 0.9789-0.9798
7. ๏ถ The forward points may remain constant for long duration unlike
the spot rates which keep fluctuating.
๏ถ In swap transactions where the trader attempts to minimize the
currency exposure, the actual spot and outright forward rates are
often of no consequence.
It is the premium or discount differential that is important measured
in forward points.
8. CONCLUSION
๏ถ Forward quotation expressed in points is not a foreign exchange rate
but it is the difference between the forward rate and the spot rate.
๏ถ when the bid points > Ask Points, we should subtract the points
from the spot rate to get the outright forward quote.
๏ถwhen the bid points < Ask Points, we should add the points to the
spot rate to get the outright forward quote.
