1. What is Forward Premium?

The forward premium is the percentage difference between the forward exchange rate and the spot exchange rate. It indicates whether a currency is trading at a premium or discount in the forward market compared to the spot market.

2. How Does the Calculator Work?

The calculator uses the forward premium formula:

Where:

• Forward Rate — The agreed exchange rate for future delivery
• Spot Rate — The current exchange rate for immediate delivery

Explanation: A positive result indicates a forward premium, while a negative result indicates a forward discount.

3. Importance of Forward Premium Calculation

Details: Forward premium is crucial in foreign exchange markets for hedging strategies, interest rate parity calculations, and assessing currency expectations.

4. Using the Calculator

Tips: Enter both forward and spot rates in the same currency units. Rates should be entered as direct quotes (domestic currency per unit of foreign currency).

5. Frequently Asked Questions (FAQ)

Q1: What does a positive forward premium mean?
A: A positive premium means the currency is more expensive in the forward market than in the spot market, often indicating higher interest rates in that country.

Q2: How is forward premium related to interest rate parity?
A: According to covered interest rate parity, the forward premium should equal the interest rate differential between two countries.

Q3: Can forward premium predict future spot rates?
A: While it reflects market expectations, forward premium is not always an accurate predictor of future spot rates due to various market factors.

Q4: What's the difference between forward premium and swap points?
A: Swap points are the raw difference between forward and spot rates, while premium is this difference expressed as a percentage of the spot rate.

Q5: How often do forward premiums change?
A: Forward premiums fluctuate continuously with changes in spot rates and interest rate expectations in the respective countries.