Forward Points

In forward trading, the term forward points denotes the basis points or pips added to or subtracted from a spot rate when calculating the future value of a currency or securities.

Forward points are most commonly used in forex trading, with the number of forward points added or subtracted determined by calculating the difference between the interest rates applicable to the two currencies making up a currency pair. When you trade a currency with a low interest rate for a currency with a high interest rate, positive points are added to the forward contract. When you trade a currency with a high interest rate for a currency with a low interest rate, negative points are added to the forward contract.

Typically, 1 forward point is equal to 1/10,000 of the spot rate.

If, for example, a forward contract had 50 forward points, you would have to add 50/10,000 of the spot price to the spot price to determine the forward rate. In this case, the forward rate would be 0.005 units higher than the spot rate. If, on the other hand, 50 forward points were subtracted from a forward contract, the forward rate would be 0.005 units lower than the spot rate.

More on this topic:
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