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CFA Level I Exam · Exchange Rate Calculations

Forward Rates, Swap Points and Covered Interest Parity

Updated 7 October 2026 · Fact-checked

A forward exchange rate is the rate agreed today for exchanging currency on a future date. Covered interest parity sets it from the spot rate and the interest rate gap: F = S × (1 + i price) ÷ (1 + i base). Forward points are simply F minus S, scaled by the quote's point size.

Understand Forward Rates, Points and Covered Interest Parity

A forward rate is a price for currency fixed today but settled later. It is not a forecast of the future spot rate. It is set by no-arbitrage, using today's spot rate and the interest rates in the two currencies.

Every quote is price currency per 1 base currency. In EUR/USD = 1.1000, EUR is the base and USD is the price currency. The forward rate is always quoted in the same direction as the spot.

The logic of covered interest parity (CIP): you can hold money in either currency and lock in the exchange rate with a forward. If the forward were not set by the rate gap, you could borrow in one currency, convert, invest in the other, and hedge, earning a risk-free profit. So the forward must remove that profit. The currency with the higher interest rate trades at a forward discount. The currency with the lower rate trades at a forward premium.

Forward points (swap points) are the dealer's way of quoting the forward. They are the forward rate minus the spot rate, scaled. For most pairs one point is 1/10,000 (0.0001). For yen pairs one point is 0.01. So F = S + points ÷ scale. Points can be negative. A positive number means the base currency is at a premium. A negative number means a discount.

On the exam, you may be asked to turn points into a forward rate, work out a premium or discount, or compute F from interest rates. The interest rates must be for the same tenor as the forward, and must be quoted annual rates scaled to the period.

Key formulas to remember

Covered interest parity (annual, simple)
F = S × (1 + i_price) ÷ (1 + i_base)
S and F are price currency per 1 base currency. Rates are annual for a 1-year forward.
CIP for a forward shorter than a year
F = S × [1 + i_price × (days ÷ 360)] ÷ [1 + i_base × (days ÷ 360)]
Use the day-count in the question (360 for most money-market rates; some currencies use 365). Use the stated convention.
Forward points
Points = (F − S) × scale
Scale is 10,000 for most pairs and 100 for JPY pairs. So F = S + points ÷ scale.
Forward premium or discount on base currency
(F − S) ÷ S
Positive = base at premium. Negative = base at discount. It is approximately the interest differential (i_price − i_base) over the period.
Direction rule
Higher interest rate currency → forward discount
If i_price > i_base, then F > S, meaning the base trades at a premium and the price currency at a discount.

How to solve Forward Rates, Points and Covered Interest Parity questions

Use this method for any forward rate question, whether the data are points or interest rates.

  1. 1Identify the base and price currency from the quote. The quote is price per 1 base.
  2. 2Write down the spot rate S and the forward tenor.
  3. 3If points are given, convert them: F = S + points ÷ scale (10,000, or 100 for yen). Add negative points as a subtraction.
  4. 4If interest rates are given, match the price currency rate to i_price and the base currency rate to i_base. Scale both by the tenor.
  5. 5Compute F = S × (1 + i_price × t) ÷ (1 + i_base × t).
  6. 6Check direction: if i_price > i_base, F must be above S. If not, you swapped the rates.
  7. 7State the premium or discount from the base currency's point of view, and convert F back into points if the question asks.

Quickest way: Rate-gap shortcut for options elimination

When to use it: Use when the three options differ in size or direction and you need a fast filter before full calculation.

  1. Compare the two interest rates. The price currency with the higher rate means F is above S.
  2. Estimate the move: (i_price − i_base) × t × S, which is close to the true forward points.
  3. Eliminate any option on the wrong side of S, or with a wildly wrong size.
  4. If two options remain, run the full formula once on your calculator.
  5. For points questions, just add or subtract points ÷ scale from S. Do not use interest rates at all.

Common mistakes in Forward Rates, Points and Covered Interest Parity

  • Putting the interest rates the wrong way round in the formula.

    Students match the rates to the first or second currency named instead of to base and price.

    Fix: The price currency (the numerator of the quote) goes on top. Then run the direction check: higher price-currency rate means F > S.

  • Using points as if one point is always 0.01.

    Yen quotes use 0.01 and students apply it to all pairs.

    Fix: Use 0.0001 per point for most pairs and 0.01 for JPY quotes. Check the number of decimals in the spot.

  • Ignoring the sign of the points.

    Points are often shown as a plain number or in brackets, and the sign is dropped.

    Fix: Treat a negative figure as a subtraction and note that a negative value means the base currency is at a discount.

  • Using the full annual rate for a 90-day or 180-day forward.

    Rushing and forgetting that the rate must be scaled to the tenor.

    Fix: Multiply each rate by days ÷ 360 (or the stated basis) before using it.

  • Quoting the premium or discount from the wrong currency's view.

    A premium for one currency is a discount for the other, and the question does not always say which.

    Fix: Always state it for the base currency: F > S means the base is at a premium.

  • Treating the forward rate as a prediction of the future spot rate.

    The forward looks like a forecast.

    Fix: Under CIP, the forward is set by arbitrage from interest rates. It is not an unbiased forecast, and the exam wants the arbitrage reasoning.

Worked examples

Example 1

The spot EUR/USD rate is 1.1000 (USD per EUR). The 6-month USD interest rate is 4.0% per year and the 6-month EUR rate is 2.0% per year. Using a 360-day basis and 180 days, what is the 6-month forward rate? A) 1.0891 B) 1.1000 C) 1.1109

Show the solution
  1. Base is EUR, price is USD. So i_price = 4.0% and i_base = 2.0%.
  2. Scale to the tenor: 180 ÷ 360 = 0.5. USD: 0.04 × 0.5 = 0.02. EUR: 0.02 × 0.5 = 0.01.
  3. F = 1.1000 × (1 + 0.02) ÷ (1 + 0.01) = 1.1000 × 1.02 ÷ 1.01.
  4. 1.02 ÷ 1.01 = 1.009901. So F = 1.1000 × 1.009901 = 1.110891.
  5. Direction check: USD rate is higher, so F > S. Option A is below spot, so it is wrong. Option B equals spot, so it is wrong.

Answer: F ≈ 1.1109 (Option C). The EUR is at a forward premium of about 109 points (1.1109 − 1.1000), because USD interest rates are higher.

Example 2

The spot USD/JPY rate is 150.00 (JPY per USD). The 3-month forward points are quoted as −85 (a point is 0.01 for this pair). What is the 3-month forward rate, and is the USD at a premium or discount? A) 149.15, USD at a discount B) 149.15, USD at a premium C) 150.85, USD at a premium

Show the solution
  1. Base is USD, price is JPY. The scale for a yen pair is 100 points per 1.00.
  2. Convert the points: −85 ÷ 100 = −0.85.
  3. F = 150.00 + (−0.85) = 149.15.
  4. F is below S, so the base (USD) is at a forward discount.
  5. Check with interest logic: the yen has the lower rate, which is the price currency here, so F < S. This agrees.

Answer: F = 149.15, with the USD at a forward discount (Option A).

Exam tips

  • Read the quote direction first. Most errors come from mixing up which currency is the base.
  • Use the direction check (higher price-currency rate means F above S) to remove at least one option before you calculate.
  • For points questions, no interest rates are needed. Just scale the points and add them with their sign.
  • Check the day-count basis and tenor in the stem. Use exactly what the question gives.
  • On a TI BA II Plus, enter the numerator and denominator with parentheses, for example 1.1 × (1 + 0.02) ÷ (1 + 0.01) =, and keep at least six decimals before rounding.

Practice questions from Exchange Rate Calculations

Forward Rates, Points and Covered Interest Parity 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, Points and Covered Interest Parity: frequently asked questions

What is the covered interest rate parity formula for CFA Level I?

F = S × (1 + i_price) ÷ (1 + i_base) for a one-year forward, with S and F quoted as price currency per 1 base currency. For shorter tenors, scale each rate by days ÷ 360 (or the basis stated). The forward is set by no-arbitrage, not by a forecast.

How do you calculate a forward exchange rate from points?

Divide the points by the scale and add the result to the spot rate. The scale is 10,000 for most pairs and 100 for yen pairs. Negative points are subtracted.

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

A base currency is at a forward premium when the forward rate is above spot. It is at a discount when the forward is below spot. The currency with the higher interest rate trades at a forward discount.

Why does the currency with the higher interest rate trade at a forward discount?

If it did not, investors could earn the higher rate and lock in the exchange rate for free. Arbitrage would push the forward until the extra interest is offset by the forward discount.