Forward Points
The pips added to or subtracted from the spot rate to calculate the forward rate, derived from interest rate differentials.
Forward points represent the interest rate differential between two currencies expressed as pips. They are added to or subtracted from the current spot rate to arrive at the forward exchange rate. Forward points are not a forecast of where spot will trade in the future; they are a mathematical reflection of the cost of holding one currency versus the other over a given period.
How It Works
- Calculated using spot rate, both currencies' interest rates, and days to settlement
- Base currency lower rate than quote = positive forward points (added to spot)
- Base currency higher rate than quote = negative forward points (subtracted from spot)
- Longer settlement dates = larger forward points as the differential compounds
Trading Tips
Use forward points to understand the carry cost of holding a position
Central bank rate decisions directly affect forward points
Compare forward point spreads between brokers, as these hidden costs add up on longer-dated contracts
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