Forward premium
A forward exchange rate above spot, meaning the base currency costs more for later delivery; below spot it is a forward discount. It reflects the interest rate differential, not a forecast.
Where you will meet it
Forward premium appears in 6 learning outcomes on the CFA syllabus. A few of them:
- Read and explain quotes for spot and forward exchange rates
“The currency with the higher interest rate trades at a forward discount.”
- Explain spot and forward exchange rates and work out a currency's forward premium or discount
“The base currency is at a forward premium when F exceeds S, which happens when the price currency has the higher interest rate.”
- Design a suitable currency management programme in light of market conditions and the portfolio's objectives and constraints
“Hedging is cheaper when the foreign currency trades at a forward premium, because selling it forward earns positive roll yield, while high volatility raises option costs and may favour forwards.”
- Derive a forward rate from the two interest rates and explain a currency's forward premium or discount
“If the price currency has the higher rate, the forward exceeds spot and the base currency trades at a forward premium.”
See also
Practise it
Practise forward premium until it is automatic: questions that explain every wrong option.
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