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.
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