Forward exchange rate contracts trade at premiums or discounts to the spot rate. These premiums and discounts are useful insights for analysts to gauge what to expect from the market, and which currencies are expected to appreciate and which ones are expected to depreciate.
The forward exchange rates are quoted in terms of points. For example, let’s say the current EUR/USD exchange rate is 1.2823. The forward quote for a 90-day forward exchange rate is +16 points. This 16 points will be interpreted as 16*1/10,000 = 0.0016 above the spot rate. A positive sign means that euro is trading at a premium relative to US dollar.
The outright forward quotation will be = 1.2823 + 0.0016 = 1.2839 (i.e., 1 EUR = $12839)
If the forward quote was -15 points instead, this means that the euro is trading at a discount relative to US dollar. The outright forward quotation will be = 1.2823 – 0.0015 = 1.2808
We can also express the forward premiums and discounts in terms of percentages of spot rates.
A premium of 16 points can be expressed as 0.0016/1.2823 = 0.0012 or 0.12%.
Let’s take one more example. The current USD/SGD spot rate is 1.2848. The quoted 1 year forward rate is -5.5 points.
The outright forward exchange rate will be 1.2824-0.00055 = 1.28185
The forward points have a negative sign, which means that the US dollar is trading at a forward discount relative to Singapore dollar.