Forward Points
The adjustment added to spot rate to calculate a forward exchange rate.
Forward points are the premium or discount added to the spot rate to determine the forward rate, reflecting interest rate differentials between two currencies (covered interest parity). If EUR rates are lower than USD rates, EUR trades at a forward premium (positive points). Calculation: Forward = Spot + Points. For example, EUR/USD spot = 1.1000, 1-year forward points = +0.0050, so 1-year forward = 1.1050. Units: Often quoted in basis points or pips. Why they exist: Arbitrage ensures forward rates embed the interest differential — otherwise you could borrow in low-rate currency, convert to high-rate currency, and lock in risk-free profit. Use: FX hedging, calculating hedge costs.
FX Forward Rate
The agreed exchange rate for a future currency transaction, derived from Covered Interest Rate Parity.
Spot Rate
The current exchange rate for immediate delivery.
FX Risk
Risk from exchange rate fluctuations affecting foreign-denominated assets.
Currency Exposure
The fraction of portfolio value exposed to a foreign currency.
FX Volatility
Standard deviation of exchange rate changes — typically 5-15% annually.
FX Correlation
How currencies move with assets or other currencies — key for diversification.