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forward points

Forward points express the difference in price between currency rates for two different delivery and payment dates, usually spot and forward (although it could be two forward rates with different maturity). Forward points mainly reflect the interest rate differential between two currencies as reflected in the Interest Parity Theorem. They are expressed in pips.

Forward points play an important role in pricing and in FX hedging. They are said to be ‘in favour of’ (‘against’) a firm that sells (buys) in currencies that trade at a forward premium and/or buys (sells) in currencies that trade at a forward discount.

Hedging with currency forwards allows firms to ‘capture’ the financial benefit of favourable forward points. If forward points are ‘against’, a variety of automated hedging tools and programs can help mitigate their impact by delaying hedging as much as possible.

 

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