Forward points are used for quotation in forward currency contract. They are added to or subtracted from the spot rate. The forward points are calculated based on prevailing rates in the two currencies used in the contract as well as the length of this contract. They are usually quoted in fractions of 1/10000, so +100 points means +0,01 to the spot rate. If the points are greater than zero, the value is forward premium, otherwise it is a forward discount.
Forward points is in relation to cross-currency basis swap. They should be very similar or the same to limit possibility of making seemingly riskless profit on currency operations. It is regulated by covered interest parity (CIP). But CIP sometimes doesn't work as it should and difference can be spotted.
- Debelle, G., Gyntelberg, J., & Plumb, M. (2006). Forward currency markets in Asia: lessons from the Australian experience.
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