Strategic Financial Management · Foreign Exchange Market

Spot and Forward Rates, Premium and Discount

Updated 11 October 2026 · Fact-checked

A spot rate is the price of a currency for settlement in two business days. A forward rate is fixed today for delivery on a future date. If the forward rate is higher than spot, the currency is at a premium; if lower, at a discount. Annualise the difference over spot to compare it with interest rates.

Understand Spot and Forward Rates, Premium and Discount

A spot rate is the exchange rate for a deal settled almost immediately, normally two business days later. A forward rate is a rate you agree today for a deal that settles on a fixed date in the future, such as 1, 3 or 6 months ahead. You lock in the rate now, so you know the rupee amount you will pay or receive later.

The forward rate usually differs from spot. If the foreign currency costs more rupees forward than spot, it is at a forward premium. If it costs fewer rupees, it is at a forward discount. Take USD/INR spot at ₹83.00 and 3-month forward at ₹83.60. The dollar is at a premium of ₹0.60, and the rupee is correspondingly at a discount against the dollar.

The gap is not a forecast of the future spot rate. It comes mainly from the interest rate difference between the two countries. The currency with the higher interest rate trades at a forward discount. The currency with the lower interest rate trades at a forward premium. That link is interest rate parity, covered in its own topic.

Banks quote two-way rates. The bid is the rate at which the bank buys the foreign currency from you. The offer (ask) is the rate at which the bank sells it to you. The offer is always higher than the bid. The forward quote is spot plus or minus the forward points (swap points), applied separately to bid and offer.

Forward cover is the main use. An exporter will receive foreign currency, so they sell it forward to the bank at the bank's bid rate. An importer will pay foreign currency, so they buy it forward at the bank's offer rate. Both remove exchange rate uncertainty.

Key rules to remember

Forward premium or discount (absolute): Forward rate − Spot rate; Positive means the base (foreign) currency is at a premium. Negative means a discount. Use the same quote direction for both rates.
Annualised forward premium or discount (%): [(Forward − Spot) ÷ Spot] × (12 ÷ n) × 100; n is the forward period in months. For days, use 365 ÷ days. This is the simple annualised rate, which is the usual exam approach.
Forward rate from points: Forward = Spot + premium points, or Spot − discount points; Apply points to bid and offer separately. Points are usually quoted in paise.
Reading the points: If the first point is smaller than the second, ADD. If the first is larger, SUBTRACT.; For example, 20/30 is added to spot. 30/20 is subtracted from spot. This keeps the offer above the bid.
Forward rate from interest rates: Forward = Spot × (1 + i_quote × n/12) ÷ (1 + i_base × n/12); Direct quote, rate for quote currency (₹) in numerator. Uses simple interest for periods up to a year. Covered in the parity topic.
Exporter and importer cover: Exporter sells at bank's bid. Importer buys at bank's offer.; Rupee amount = foreign amount × applicable forward rate.

How to solve Spot and Forward Rates, Premium and Discount questions

Use this order for any forward rate question on premium, discount or cover.

1Write down the quote basis, such as ₹ per USD, and the spot bid and offer.
2Identify the forward period in months or days, and whether the question gives points or a forward rate.
3If points are given, compare the two numbers. Add if the first is smaller, subtract if larger. Apply to bid and offer.
4Decide whether the transaction is a sale or a purchase of foreign currency by the customer.
5Take the bank's bid for an exporter selling foreign currency, and the bank's offer for an importer buying it.
6Multiply the foreign amount by the chosen rate to get the rupee amount.
7For annualised premium or discount, divide (forward − spot) by spot, then multiply by 12 ÷ months and by 100.
8State the result as premium or discount, and write a one-line conclusion.

Quickest way: Points, then bid or offer

When to use it: Use this when the question gives swap points and asks for the rupee amount of an export or import cover.

Compare the two points. First smaller, add. First larger, subtract.
Add or subtract the points in rupees (divide paise by 100).
Exporter: pick the lower number (bid). Importer: pick the higher number (offer).
Multiply by the foreign amount.
For annualised percentage, compute (points ÷ spot) × (12 ÷ months) × 100 using the mid-rate or the rate the question specifies.

Common mistakes in Spot and Forward Rates, Premium and Discount

Using the offer rate for an exporter, or the bid rate for an importer.
Students think from the customer's side instead of the bank's side. Quotes are from the bank's view.
Fix: Remember the bank buys at bid and sells at offer. An exporter sells to the bank, so use the bid. An importer buys from the bank, so use the offer.
Adding forward points when they should be subtracted.
Points like 30/20 look like premium, and students add by habit.
Fix: Check that the forward offer stays above the forward bid. If the first number is larger, subtract both from spot.
Forgetting to annualise the premium.
The absolute difference looks like the answer, and students stop there.
Fix: Whenever the question says per annum or compares with interest rates, multiply by 12 ÷ months.
Dividing by the forward rate instead of spot.
Students mix this with a return formula or think the later rate is the base.
Fix: The base is spot unless the question says otherwise. Write (F − S) ÷ S.
Treating paise points as rupees.
A quote like 40/50 is written without units, and students add 40 to ₹83.
Fix: Points are in paise. Convert by dividing by 100 before adding, so 40 points is ₹0.40.
Calling the wrong currency the premium currency.
With a direct quote, a higher forward rate means the foreign currency is at a premium, but students say the rupee is.
Fix: State the currency first. If the forward ₹ per USD is higher, the USD is at a premium and the rupee at a discount.

Worked examples

Example 1

The spot rate is ₹83.20/83.30 per USD. The 3-month forward points are 40/50 paise. An Indian exporter will receive USD 2,00,000 in 3 months and covers with a forward contract. Find the forward rate used, the rupee proceeds, and the annualised forward premium using the mid-rate of spot.

Show the solution

The first point (40) is smaller than the second (50), so add the points.
Forward bid = 83.20 + 0.40 = ₹83.60. Forward offer = 83.30 + 0.50 = ₹83.80.
The exporter sells USD to the bank, so use the bank's bid: ₹83.60.
Rupee proceeds = 2,00,000 × 83.60 = ₹1,67,20,000.
Spot mid-rate = (83.20 + 83.30) ÷ 2 = ₹83.25. Forward mid-rate = (83.60 + 83.80) ÷ 2 = ₹83.70.
Premium = 83.70 − 83.25 = ₹0.45.
Annualised premium = (0.45 ÷ 83.25) × (12 ÷ 3) × 100 = 0.005405 × 4 × 100 = 2.16% approximately.

Answer: Forward rate ₹83.60 per USD; proceeds ₹1,67,20,000; USD is at an annualised forward premium of about 2.16%.

Example 2

An Indian importer must pay USD 1,50,000 in 6 months. Spot is ₹82.50/82.60 per USD. The 6-month forward points are 60/45 paise. Find the forward rate the importer gets and the rupee outflow. Also compute the annualised forward discount, using the spot offer rate and the forward offer rate.

Show the solution

The first point (60) is larger than the second (45), so subtract the points.
Forward bid = 82.50 − 0.60 = ₹81.90. Forward offer = 82.60 − 0.45 = ₹82.15.
The importer buys USD from the bank, so use the bank's offer: ₹82.15.
Rupee outflow = 1,50,000 × 82.15 = ₹1,23,22,500.
Difference on the offer side = 82.15 − 82.60 = −₹0.45, a discount of ₹0.45.
Annualised discount = (0.45 ÷ 82.60) × (12 ÷ 6) × 100 = 0.005448 × 2 × 100 = 1.09% approximately.

Answer: Forward rate ₹82.15 per USD; outflow ₹1,23,22,500; USD is at an annualised forward discount of about 1.09%.

Exam tips

Always write the quote basis and label bid and offer before you start. Many marks are lost on the wrong side of the quote.
If the question gives the forward rate in points, check the order of the numbers before adding or subtracting.
State clearly which currency is at a premium or discount. Examiners often award a mark for this line alone.
In MCQs, check the period. A 2-month forward needs 12 ÷ 2 = 6 as the annualising factor.
In a hedging case, finish with a recommendation: cover, or remain uncovered, with the rupee amounts compared.

Practice questions from Foreign Exchange Market

Spot and Forward Rates, Premium and Discount in other exams

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

Spot and Forward Rates, Premium and Discount: frequently asked questions

What is the difference between spot and forward rate?

The spot rate applies to settlement in two business days. The forward rate is agreed today for settlement on a fixed future date. The forward rate differs from spot mainly because of the interest rate gap between the two currencies.

How do I calculate forward premium or discount?

Subtract the spot rate from the forward rate. Divide by spot, then multiply by 12 ÷ months and by 100 to get the annualised percentage. A positive result is a premium, and a negative result is a discount.

Which rate does an exporter use in a forward contract?

An exporter sells foreign currency to the bank, so the bank's bid (buying) rate applies. This is the lower of the two quoted rates.

When do I add forward points to spot and when do I subtract?

Add them when the first point is smaller than the second, for example 40/50. Subtract them when the first is larger, for example 60/45. This keeps the forward offer above the forward bid.