This guide is provided by Alt21 Limited, trading as Alt21, an FCA authorised payments and FX provider and is intended for UK businesses considering FX hedging as part of their treasury activity. All examples provided are illustrative only and not a current or guaranteed rate. Please read the full disclaimer at the bottom of the page.
If you’ve ever queried why your forward rate looks different to today’s spot rate, the answer comes down to FX forward points.
They’re not a forecast, a fee, or a guess about where the market is heading. They’re a mathematical adjustment, driven by the interest rate gap between two currencies, that turns a spot rate into a forward rate.
For finance teams booking their first Forward Contract, understanding forward points makes the whole process far less mysterious and much easier to check against what your provider is quoting you.
To help demystify FX forward points, we interviewed Tom Vooght, Head of Sales at Alt21, and Chris Canning, Vice President of Sales & Trading at Alt21, to share the practical insights they use when helping businesses manage currency risk.
This guide combines their expertise with clear explanations to help you understand one of the key concepts behind corporate FX hedging.
As Alt21 employees, their comments throughout this guide reflect their own experience working with Alt21’s clients and describe Alt21’s own products and approach, rather than independent market commentary.
Quick summary
- Forward rate points reflect the interest rate gap between two currencies and the length of the contract.
- The main difference between a forward and a swap is that a forward contract involves a single exchange of an asset or currency at a predetermined future date while a swap involves multiple cash flows or a simultaneous near-date and far-date reversal transaction.
- Interest rate differentials, contract length (tenor), central bank policy, market expectations, liquidity, and market conditions all influence forward points.
- A simplified FX forward points formula is: Forward Points = Forward Rate − Spot Rate
What are forward points in FX
Forward points in FX are the adjustment applied to the current spot exchange rate to calculate the exchange rate for a forward contract. They’re usually quoted in pips, the smallest standard movement in an exchange rate, and added to or subtracted from the spot rate to produce the forward rate.
A forward contract allows two parties to agree today on an exchange rate for a currency transaction that will take place at a future date. Rather than using today’s spot rate, the future rate is adjusted using forward points.
Forward points represent the difference between:
- The current spot exchange rate
- The agreed forward exchange rate
Forward points exist because interest rates differ between two currencies. They’re not based on market predictions about where exchange rates will move, nor are they an indication that one currency is expected to strengthen or weaken.
Instead, they reflect the cost (or benefit) of holding one currency instead of another until settlement.
For example:
- Spot EUR/USD = 1.1700
- Forward points = +75
- Forward rate = 1.1775
Or:
- Spot EUR/USD = 1.1700
- Forward points = -40
- Forward rate = 1.1660
Whether the points are positive or negative depends largely on the interest rate differential between the two currencies.
Forward points are derived from the interest rate differential between the two currencies in the pair, based on a principle known as covered interest rate parity.
This principle holds that the forward rate should adjust to reflect the interest rate gap, so that borrowing one currency to invest in the other doesn’t create a risk-free profit.
In practice, this means:
- A currency with a higher interest rate than its pair typically trades at a forward discount (negative forward points).
- A currency with a lower interest rate than its pair typically trades at a forward premium (positive forward points).
Understanding FX forward points explained in this way helps remove one of the biggest misconceptions around forward pricing:
They’re a pricing adjustment, not an additional charge.
This is something Tom sees come up constantly with clients moving into euros:
“Take sterling-euro. The spot rate might be around 1.14. But if you’re buying euros forward, you might only get 1.12 – and the client will ask why it’s so much worse. That’s forward points.”
What’s the difference between a swap and a forward?
The main difference between a forward and a swap is structural:
- A forward is used to fix a future price.
- An FX swap is used to manage the timing of cash flows, often by two businesses (or a business and its provider) that already hold offsetting currency positions.
FX Forward
A forward contract is a single agreement to exchange one currency for another on a specified future date at a rate agreed today.
Businesses commonly use forwards to:
- Protect future FX international payments
- Lock in costs for budgeting
- Reduce uncertainty caused by currency movements
A forward contract creates a binding obligation to transact at the agreed rate, even if the market subsequently moves in your favour, and may involve margin requirements.
For example, a UK importer knows they’ll need to pay a supplier in euros in three months. They enter into a forward contract today to secure the exchange rate.
FX Swap
An FX swap combines two transactions:
- A spot transaction
- A forward transaction
The currencies are exchanged immediately and then exchanged back on a future date.
Rather than hedging future payments, FX swaps are commonly used for short-term liquidity or funding purposes.
| FX Forward | FX Swap |
| One future exchange | Two linked exchanges |
| Used to hedge FX exposure | Used for funding and liquidity |
| Single settlement date | Two settlement dates |
In both cases, forward points are doing the same job:
Adjusting the exchange rate to account for the interest rate differential over the period involved.
How do forward points work?
The easiest way to understand forward points is to think of them as an adjustment rather than a separate price.
Forward points work by adjusting the spot rate upwards or downwards, depending on which currency in the pair carries the higher interest rate.
The longer the contract term, the larger the adjustment tends to be, because interest rate differentials compound over time. A three-month forward will usually show smaller forward points than a twelve-month forward on the same pair.
This is why a forward rate can look counterintuitive if you’re only thinking in terms of where you expect the market to move.
Chris breaks down the mechanism in plain terms:
“If you’re locking in a rate for next year, what we’re effectively doing is saying: you keep your pounds in your account and earn the interest on them over that year. But you haven’t got the dollars, so you’re losing out on the interest the dollars would have earned you. You’re gaining on the pound side and losing on the dollar side – and it’s those two rates set against each other that give you the forward rate.”
Forward Rate = Spot Rate ± Forward Points
The adjustment reflects the interest rate differential between the two currencies over the length of the contract.
For example:
| Item | Value |
| Spot Rate | 1.1700 |
| Forward Points | +50 |
| Forward Rate | 1.1750 |
If the forward points were negative:
| Item | Value |
| Spot Rate | 1.1700 |
| Forward Points | -50 |
| Forward Rate | 1.1650 |
The longer the forward contract, the larger the adjustment tends to become because the interest rate differential applies over a longer period.
This is why you’ll often hear traders refer to different contract lengths, known as standard tenors for FX forward points EUR/USD or other currency pairs.
Common tenors include:
- Overnight
- One week
- One month
- Three months
- Six months
- Nine months
- Twelve months
Each tenor has its own forward points because the interest rate adjustment changes over time.
What influences forward points?
Several factors shape the size and direction of forward points for any given currency pair and tenor:
Interest rate differentials
This is the primary factor.
If interest rates are higher in one currency than another, forward points adjust accordingly.
For example:
- Bank of England base rate
- European Central Bank policy rate
Differences between these rates directly affect GBP/EUR forward pricing.
Time to settlement
The further into the future the contract settles, the larger the forward point adjustment is likely to be.
A one-month forward will usually have fewer forward points than a twelve-month forward.
Currency pair
Every currency pair behaves differently.
EUR/USD, GBP/USD and GBP/EUR all have different forward curves because each pair reflects different interest rate relationships.
As Chris puts it:
“Because the difference in interest rates between pounds and dollars is next to nothing, your rate in a year is pretty much the same as today’s. But if you’re buying or selling something like South African rand, which has a much higher interest rate, you’ll see a much bigger gap between spot and forward.”
Market interest rate expectations
Forward points are derived using prevailing money market interest rates.
As interest rate expectations change, forward points can also change throughout the day.
Market liquidity
Highly traded currency pairs generally experience tighter pricing than less liquid currencies.
Although liquidity doesn’t determine forward points directly, it can influence pricing around the forward contract.
It’s worth remembering that forward points reflect interest rate expectations, not currency direction. A common misunderstanding is treating forward points as a signal about future spot rates when they’re not designed to work that way.
Pros and cons of forward contracts
Forward Contracts, which are priced using forward points, can help some businesses build greater certainty into future costs.
As with any FX product, suitability depends on individual circumstances, and it’s worth weighing up the benefits and limitations before deciding whether one is right for your business.
Potential benefits
- Can help support planning and budgeting by fixing a known exchange rate for a future date
- May help preserve planned margins on international sales or purchases
- Supports more informed decisions around supplier and customer pricing
- Removes the need to monitor the market daily for a specific transaction
Limitations to consider
- A Forward Contract fixes the rate for better or worse. If the market moves in your favour afterwards, you won’t benefit from that movement on the hedged amount.
- Forward Contracts typically require businesses to complete the agreed transaction, so they suit predictable payment dates and amounts.
- They don’t remove currency exposure entirely; they change how that exposure is managed.
- Depending on the provider, some contracts may require margin or credit arrangements.
Because suitability varies by business, it’s worth discussing your specific payment patterns and objectives with a provider before deciding whether a Forward Contract fits your plans.
Understanding FX forward points is only one part of using forward contracts effectively.
If you’d like to learn how forward contracts work, when businesses typically use them and what considerations to keep in mind, explore our guide to Forward Contracts.
Disclaimer: Forward contracts and other FX hedging products may not be suitable for every business. Their suitability depends on your objectives, financial circumstances and risk appetite. Exchange rates and forward pricing are influenced by market conditions and can change over time.
Examples of forward points
Here’s a simplified example to show forward points in action.
Say the EUR/USD spot rate is 1.1000. The eurozone interest rate is 4%, and the US interest rate is 2%, for a one-year tenor.
Using the interest rate differential, the one-year forward rate can be worked out as:
Forward Rate = Spot Rate × (1 + USD rate) ÷ (1 + EUR rate) Forward Rate = 1.1000 × (1.02 ÷ 1.04) = 1.0788
In this example, the forward rate (1.0788) is lower than the spot rate (1.1000). The difference – roughly 212 points – reflects the euro’s higher interest rate relative to the dollar. A business agreeing to sell EUR and buy USD in a year would use this forward rate rather than today’s spot rate, giving it a known rate to plan around, whatever happens to the market between now and settlement.
Here are some more examples using positive and negative forward points and tenors:
Example: Positive forward points
A UK importer needs to buy euros in six months.
| Item | Value |
| Spot Rate | 1.1700 |
| Forward Points | +80 |
| Forward Rate | 1.1780 |
The agreed forward rate becomes 1.1780.
Example: Negative forward points
A business expects to receive US dollars in three months.
| Item | Value |
| Spot Rate | 1.3500 |
| Forward Points | -45 |
| Forward Rate | 1.3455 |
The forward rate is lower than today’s spot rate because of the interest rate relationship between the currencies.
Example: Different tenors
| Tenor | Forward Points |
| 1 Month | +12 |
| 3 Months | +39 |
| 6 Months | +76 |
| 12 Months | +148 |
These figures are illustrative only. Actual forward points change continuously with market conditions.
How to calculate Foreign Exchange Forward Points
If you want to know how to calculate FX forward points yourself, the calculation starts with the interest rate differential between the two currencies and the number of days until settlement.
A commonly used FX forward points formula is:
Forward Points = Spot Rate × (Interest Rate Differential × Days ÷ 360)
Where:
- Spot Rate is today’s exchange rate for the currency pair.
- Interest Rate Differential is the difference between the quote currency’s interest rate and the base currency’s interest rate (expressed as a decimal).
- Days is the number of days until the forward’s settlement date.
- 360 (or 365, depending on the currencies and market convention) is the day count basis used for the calculation.
A more complete version of the FX forward points calculation, which produces the forward rate directly rather than just the point adjustment, is:
Forward Rate = Spot Rate × (1 + Quote Currency Rate × Days/360) ÷ (1 + Base Currency Rate × Days/360)
The forward points are then simply the forward rate minus the spot rate, usually expressed in pips by multiplying the difference by 10,000 (for most currency pairs) or 100 for pairs like USD/JPY.
In practice, financial institutions calculate forward points using interest rate parity, which takes into account:
- Spot exchange rate
- Interest rate of Currency A
- Interest rate of Currency B
- Time until settlement
This is why forward points reflect financing costs rather than market expectations.
FX forward points calculation in Excel
Many finance teams prefer to build this out in a spreadsheet so they can test different tenors and rates. To calculate FX forward points in Excel, you’d typically set up:
- One cell for the spot rate.
- Two cells for the base and quote currency interest rates.
- One cell for the number of days to settlement.
- A formula cell combining these using the forward rate formula above, referencing each input cell rather than hardcoding numbers.
Building it this way means you can update the interest rate or tenor and instantly see how the forward rate and forward points shift, which is useful when comparing quotes from different providers or testing several tenors side by side.
Additional formulas can then calculate:
- Percentage difference
- Implied forward rate
- Different settlement dates
- Scenario comparisons
Larger treasury teams may integrate these calculations into treasury management systems rather than relying on spreadsheets.
Standard tenors for FX forward points EUR/USD
Forward points for EUR/USD, like most major pairs, are typically quoted across a set of standard tenors rather than for every individual date. These commonly include:
- Spot-next (SN)
- 1 week (1W)
- 2 weeks (2W)
- 1 month (1M)
- 2 months (2M)
- 3 months (3M)
- 6 months (6M)
- 9 months (9M)
- 1 year (1Y)
- Longer tenors, out to 2, 3 or 5 years, for businesses with longer-term FX exposure
A settlement date that falls between two standard tenors is known as a “broken date,” and pricing for these is generally interpolated from the surrounding standard tenors.
FAQs
What is the FX forward points formula?
A widely used formula is Forward Rate = Spot Rate × (1 + Quote Currency Rate × Days/360) ÷ (1 + Base Currency Rate × Days/360). The forward points are the difference between this forward rate and the spot rate.
How are FX forward points calculated day to day?
They’re recalculated continuously as interest rates, spot rates and time to settlement change, which is why forward points for the same currency pair can look different from one day to the next, even if the underlying interest rate differential hasn’t moved much.
Are forward points the same as a provider’s margin?
No. Forward points reflect the interest rate differential and are part of the underlying market calculation. Any margin a provider applies sits on top of this, within the all-in rate you’re quoted.
Do forward points predict future exchange rates?
No. Forward points are a mathematical reflection of interest rate differentials over a set period, not a forecast of where the spot rate will actually be on the settlement date.
Forward points sit behind every Forward Contract, shaping the rate you’re quoted long before you ever agree to a trade. Understanding how they work can help you ask sharper questions when comparing providers and plan future costs with a clearer sense of what’s driving the numbers.
ALT 21 Limited is authorised and regulated by the Financial Conduct Authority (FRN: 783837) and is a company registered in England and Wales (number 10723112). The registered address is 45 Eagle Street, London WC1R 4FS, United Kingdom. This article has been produced by ALT 21 Limited for information purposes only. It does not constitute financial advice or an offer to sell or the solicitation of an offer to buy any products referenced. Hedging products are not suitable for every business. Before entering into any FX product, you should consider whether it is appropriate for your needs and circumstances. ALT 21 Limited assumes no liability for errors, inaccuracies or omissions. Eligibility criteria and terms and conditions apply to all products and services offered by ALT 21 Limited. Not all applications will be accepted.
