CFA Level I Exam · Capital Flows and the FX Market

Forward Rates and Forward Points in the FX Market

Updated 7 October 2026 · Fact-checked

A forward exchange rate is the rate agreed today for exchanging currencies at a future date. Compute it as F = S × (1 + i_price × T) ÷ (1 + i_base × T), where S is price currency per base currency. Forward points are F − S, scaled by 10,000 for most pairs. Value an existing forward by discounting the rate difference.

Understand Forward Rates and Points

A spot rate is for settlement in about two business days. A forward rate is fixed today for settlement on a later date, such as 90 days or 1 year. The forward contract locks in the rate, so neither party faces exchange rate uncertainty on that trade.

The forward rate is not a forecast. It comes from no-arbitrage. If you could borrow one currency, convert it at spot, invest it, and lock in a forward to convert back at a profit, everyone would do it. Prices adjust until that profit disappears. This is covered interest rate parity. The result: the currency with the higher interest rate trades at a forward discount, and the currency with the lower interest rate trades at a forward premium.

Quotes follow the form price currency / base currency, written P/B. The rate is the price of one unit of the base currency in price-currency units. In the formula, the interest rate of the price currency goes in the numerator and the base currency rate in the denominator. Get this wrong and the whole answer is wrong.

Forward points are the forward rate minus the spot rate, quoted in units of the last decimal place. For most pairs the point is 1/10,000 (0.0001). For pairs quoted in yen it is 1/100 (0.01). Dealers quote spot and points separately, for example spot 1.1000 with +25.0 points means a forward of 1.1025. A positive number means the base currency is at a forward premium.

After initiation, a forward contract has value because the market forward rate moves away from your contract rate. The value is the difference between the new forward rate and the contract rate, times the notional, discounted at the price-currency rate over the remaining time. The value is in the price currency.

Key formulas to remember

Forward rate (annual rates, simple interest): F = S × (1 + i_P × T) ÷ (1 + i_B × T); S and F are P/B. i_P is the price-currency rate, i_B the base-currency rate. T is the year fraction, such as 90/360. Use the day-count the question gives for each currency.
Forward rate (compounded annual rates): F = S × (1 + i_P)^T ÷ (1 + i_B)^T; Use when the question gives annual compounded rates for periods of a year or more.
Forward points: Points = (F − S) × scaling factor; Scaling factor is 10,000 for most pairs and 100 for yen pairs. Convert back by dividing by the factor.
Forward premium or discount: Premium (+) or discount (−) on base = (F − S) ÷ S; Positive means the base currency is worth more forward. This happens when i_P > i_B.
Value of a forward before expiry (long base currency): V = [F_new − F_contract] ÷ [1 + i_P × T_remaining] per unit of base currency; F_new is the current forward rate for the remaining term. Multiply by notional. Value is in the price currency. The short position has the opposite sign.

How to solve Forward Rates and Points questions

Use this order for any forward rate, points or forward valuation question.

1Write the quote as P/B and identify the price currency and the base currency.
2List the spot rate, the two interest rates, and the day-count or year fraction for the horizon.
3Match each rate to its currency: price-currency rate on top, base-currency rate on the bottom.
4Compute the forward rate F, then the points as (F − S) times the scaling factor.
5Decide premium or discount: the base currency is at a premium if i_P > i_B, a discount if i_P < i_B. Check your answer agrees.
6For valuation, find the new forward rate for the remaining term, subtract the contract rate (for a long base position), multiply by notional, and discount at the price-currency rate.
7Check units and sign, then pick the option. Numerical options run smallest to largest, so check where your answer sits in the order.

Quickest way: Interest rate differential shortcut

When to use it: Use when options are well separated and you need a fast estimate of forward points or the direction of the forward.

Approximate forward points ≈ S × (i_P − i_B) × T × 10,000.
If i_P > i_B, the points are positive and F > S. If i_P < i_B, the points are negative and F < S.
Use the sign alone to remove one or two options when both signs appear.
Compare the size of your estimate with the options. Compute exactly only if two options are close.
On the BA II Plus, enter the full ratio in one line using parentheses, for example 1.1000 × (1 + 0.04 × 90 ÷ 360) ÷ (1 + 0.02 × 90 ÷ 360) =.

Common mistakes in Forward Rates and Points

Putting the base-currency rate in the numerator.
Students often put the rate of the currency they are buying, or the base currency, on top by mistake. Others mix up which currency is the base.
Fix: Always write P/B first. The rule is price-currency rate on top: the price currency (the numerator of the quote) has its rate in the numerator of the formula.
Forgetting to scale points by 10,000 (or 100 for yen).
The F − S gap looks tiny, such as 0.0025, so students report it as is.
Fix: Multiply by the scaling factor and say the answer in points. Check the options to see which form is expected.
Using a full-year rate without multiplying by T.
Rushing: the rates are annual and the horizon is 90 or 180 days.
Fix: Adjust each rate by its day-count fraction, using the convention given in the question, before dividing.
Calling the currency with the higher interest rate the one at a forward premium.
Students link high rates with strength.
Fix: Higher interest rate means forward discount for that currency. Check with the formula direction.
Discounting a forward's value at the wrong rate or not discounting at all.
Students stop at the difference between the two forward rates.
Fix: Discount the gap at the price-currency rate over the remaining time, then multiply by the notional.
Reading the forward points as a sign of a forecast that the currency will move.
Forward rates look like predictions.
Fix: Forward points only reflect the interest differential under no-arbitrage. They are not an expected future spot rate.

Worked examples

Example 1

The spot rate is 1.2000 USD/EUR. The 180-day USD interest rate is 3.00% per year and the 180-day EUR rate is 1.00% per year, both on a 360-day basis. What is the 180-day forward rate, and how many forward points is it?

Show the solution

The quote is USD/EUR, so USD is the price currency and EUR is the base currency.
T = 180 ÷ 360 = 0.5.
Numerator: 1 + 0.03 × 0.5 = 1.015.
Denominator: 1 + 0.01 × 0.5 = 1.005.
F = 1.2000 × 1.015 ÷ 1.005 = 1.2000 × 1.0099502 = 1.211940.
Points = (1.211940 − 1.2000) × 10,000 = 119.4.
i_P > i_B, so EUR is at a forward premium, which matches F > S.

Answer: Forward rate ≈ 1.2119 USD/EUR, about +119.4 points. EUR trades at a forward premium.

Example 2

A dealer entered a 1-year forward to buy EUR 1,000,000 at 1.1000 USD/EUR. Six months later, 6 months remain. The current 6-month forward rate is 1.1200 USD/EUR and the 6-month USD rate is 4.00% per year. What is the value of the position in USD?

Show the solution

The position is long EUR, the base currency, so value is positive when the new forward exceeds the contract rate.
Rate gap = 1.1200 − 1.1000 = 0.0200 USD per EUR.
Gap on notional = 0.0200 × 1,000,000 = USD 20,000.
Discount at the USD rate for 0.5 year: 1 + 0.04 × 0.5 = 1.02.
Value = 20,000 ÷ 1.02 = 19,607.84.

Answer: The long EUR forward is worth about USD 19,608.

Exam tips

Always write the quote as P/B before touching numbers. Most wrong answers trace back to a swapped currency.
Check the sign of the points first. If i_P > i_B the points are positive. This can eliminate two options quickly.
Read the day-count in the stem. Some questions use 360 days, others use months, so follow what is given.
For valuation questions, expect to discount at the price-currency rate. An option equal to the undiscounted gap is a common trap.
Do not spend time on exact decimals if the options differ widely. With about 90 seconds a question, estimate first.

Practice questions from Capital Flows and the FX Market

Forward Rates and Points in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Forward Rates and Points: frequently asked questions

How do you calculate forward points in CFA Level I?

Find the forward rate using F = S × (1 + i_P × T) ÷ (1 + i_B × T). Subtract the spot rate and multiply by 10,000 for most pairs, or 100 for yen pairs. The result is the points figure, which can be positive or negative.

What is the difference between a forward premium and a forward discount?

A base currency at a forward premium has a forward rate above spot. A base currency at a forward discount has a forward rate below spot. The currency with the lower interest rate trades at a premium.

Is the forward rate a prediction of the future spot rate?

No. The forward rate comes from no-arbitrage and the interest rate difference. It is the rate that removes risk-free profit, not a forecast of where spot will be.

How do you value an FX forward contract after it is initiated?

Find the current forward rate for the remaining term. Take the difference from the contract rate, multiply by the notional, and discount at the price-currency rate for the remaining time. Reverse the sign for the short position.