Explain spot and forward exchange rates and work out a currency's forward premium or discount
The idea
The forward rate comes from arbitrage, not forecasting, and the rates are de-annualised. With quotes as price currency per unit of base, F = S × (1 + i price × days ÷ 360) ÷ (1 + i base × days ÷ 360). The base currency is at a forward premium when F exceeds S, which happens when the price currency has the higher interest rate. Forward points are F − S scaled by 10,000 for four-decimal pairs and are added to the spot bid and offer to give the all-in forward quote. The percentage premium is (F − S) ÷ S. If the base is at a premium, the price currency is at a discount.
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