FRM Exam Part I · Foreign Exchange Markets

Spot, Forward and Swap FX Transactions Explained

Updated 11 October 2026 · Fact-checked

A spot FX deal settles in about two business days. An outright forward fixes a rate for a later date. An FX swap combines a spot deal and an opposite forward deal. The forward rate equals spot plus forward points, and covered interest parity sets those points from the interest rate gap between the two currencies.

Understand Spot, Forward and Swap FX Transactions

A spot FX transaction is an exchange of two currencies at today's agreed rate, with settlement usually two business days later (the value date). Some pairs, such as USD/CAD, settle one business day later. The spot rate is quoted as units of the quote currency per one unit of the base currency. In EUR/USD = 1.0850, EUR is the base and USD is the quote.

An outright forward is one agreement to exchange currencies at a fixed rate on a future value date beyond spot. You use it to lock in a rate for a known future cash flow, such as an export receipt. It creates a real FX position until it settles, so it hedges an underlying exposure.

An FX swap is two deals done together with the same counterparty. You buy a currency on the near date and sell the same amount back on the far date, or the reverse. The near leg is usually spot, and the far leg is a forward. The notional is the same on both legs, so you have no net FX exposure. You have swapped one currency for another for a period. Banks and corporates use FX swaps to roll positions and to borrow one currency against another. Do not confuse it with a cross-currency swap, which exchanges interest payments over several years.

The forward rate is not a forecast of the future spot rate. It follows from no-arbitrage and covered interest rate parity. The currency with the higher interest rate trades at a forward discount, and the lower-rate currency trades at a forward premium. The difference between forward and spot is quoted in forward points (swap points). One point is a pip: 0.0001 for most pairs, and 0.01 for pairs with JPY as the quote currency.

Dealers quote forwards as spot plus points, with a bid and an ask. In an FX swap, the price you negotiate is the points. The spot leg is struck at the current spot rate, and the far leg is spot plus the points. The net cost or gain of the swap reflects the interest rate differential.

Key formulas to remember

Forward rate from interest rates (CIP): F = S × (1 + r_quote × d/basis_quote) ÷ (1 + r_base × d/basis_base); S and F are quote currency per unit of base currency. d is the days to the forward date. Use simple interest with each currency's own day-count basis: 360 for USD and EUR, 365 for GBP. The formula reduces to d/360 for both currencies only when both currencies use 360. Use the day count the question states.
Forward points: Forward points (pips) = (F − S) × 10,000; Use × 100 when the quote currency is JPY. Positive points mean a forward premium for the base currency. Negative points mean a discount.
Forward rate from points: F = S + points ÷ 10,000; Use ÷ 100 for JPY quote pairs. Apply the bid points to the spot bid and the ask points to the spot ask.
Premium or discount rule: r_quote > r_base ⇒ F > S (base at premium); r_quote < r_base ⇒ F < S (base at discount); Compare rates for the same period as the forward. The higher-interest-rate currency trades at a forward discount.
Reading bid-ask points: If the first points figure < the second, add both to spot. If the first > the second, subtract both.; This is a market convention shorthand, not a derived formula. Check that the forward ask stays above the forward bid.
FX swap structure: Near leg at S, far leg at F, same notional, opposite directions; Net FX exposure is zero. The economic cost is the forward points.

How to solve Spot, Forward and Swap FX Transactions questions

Use this order for any question on spot, forward or swap FX deals.

1Identify the base currency and the quote currency from the pair quote (base/quote). Write the spot rate as quote per base.
2Identify the deal type: spot, outright forward, or FX swap. Note the value dates and the notional.
3If you are given interest rates, compute F = S × (1 + r_quote × d/basis_quote) ÷ (1 + r_base × d/basis_base). Use 360 for both currencies only when both use 360. Check the day count for each currency.
4If you are given forward points, convert them to price units (÷ 10,000, or ÷ 100 for JPY) and add them to spot. For two-way quotes, match bid to bid and ask to ask.
5Sanity check the direction: the higher-rate currency should be at a forward discount.
6Choose the correct side of the quote. You sell the base currency at the dealer's bid and buy it at the dealer's ask.
7For a swap, price each leg separately: near leg at spot, far leg at forward. The net cash difference is the swap cost.
8State the answer in the units requested: rate, pips, or amount in the right currency.

Quickest way: Premium or discount shortcut with points

When to use it: Use it when the options are close in value and you need to eliminate wrong answers quickly, or when the question gives points rather than rates.

Compare the two interest rates first. This tells you whether forward points must be positive or negative.
Eliminate any option with the wrong sign or a forward rate on the wrong side of spot.
Estimate points ≈ S × (r_quote − r_base) × d/360 × 10,000, a close approximation for short terms.
Compute exactly only if two options remain close. A financial calculator in chain mode handles the ratio in one pass.
For bid-ask questions, remember that the dealer buys the base at the bid and sells at the ask. The customer gets the less favourable side.

Common mistakes in Spot, Forward and Swap FX Transactions

Inverting the forward formula, putting the base rate in the numerator.
Students memorise the formula without fixing which currency is the quote currency.
Fix: Write the pair as base/quote first. The quote currency's rate goes in the numerator and the base currency's rate in the denominator.
Treating the forward rate as the expected future spot rate.
Forwards look like predictions.
Fix: The forward comes from the interest rate gap through no-arbitrage. It is not a forecast, and it can differ from the realised spot.
Getting the sign of forward points wrong.
Students forget which currency is the higher-rate one.
Fix: For rates over the same period, the higher-rate currency is at a forward discount, so the base currency has negative points when r_base > r_quote. Check the sign before computing.
Using the wrong pip size for JPY pairs, or adding points without converting.
Points are quoted in pips as numbers like 40 or 40.4, and the pip size is easy to forget.
Fix: Divide by 10,000 for most pairs and by 100 for JPY quote pairs, then add to spot.
Confusing an FX swap with a currency swap or with two unrelated forwards.
The words swap and forward overlap.
Fix: An FX swap is one near leg plus one opposite far leg, same notional, with no net FX exposure. An outright forward leaves an open position.
Using the wrong side of the bid-ask quote.
Students quote from their own viewpoint instead of the dealer's.
Fix: The dealer buys the base currency at the bid and sells it at the ask. A customer selling the base currency gets the bid.

Worked examples

Example 1

EUR/USD spot is 1.0850. The 90-day USD interest rate is 4.00% and the 90-day EUR rate is 2.50%, both simple, ACT/360. Find the 90-day forward rate and the forward points.

Show the solution

The base currency is EUR and the quote currency is USD. So r_quote = 4.00% and r_base = 2.50%.
Quote-side growth factor: 1 + 0.04 × 90/360 = 1.01.
Base-side growth factor: 1 + 0.025 × 90/360 = 1.00625.
F = 1.0850 × 1.01 ÷ 1.00625 = 1.0850 × 1.003727 = 1.08904.
Forward points = (1.08904 − 1.0850) × 10,000 ≈ 40.4 pips.
Check: USD has the higher rate, so USD is at a forward discount and EUR at a premium. F > S, which agrees.

Answer: The 90-day forward rate is about 1.0890 USD per EUR, a premium of about 40 pips over spot.

Example 2

A company holds EUR 10,000,000 now and needs USD for 3 months. It does an FX swap using the forward from the first example, with the far-leg rate quoted to 5 decimals as 1.08904. It sells EUR 10,000,000 spot at 1.0850 and buys EUR 10,000,000 forward 3 months at 1.08904. Find the cash flows and the net cost of the swap in USD.

Show the solution

The far leg uses the forward of 1.08904 from the first example. This is the exact CIP forward (1.0850 × 1.01 ÷ 1.00625 = 1.089043...) rounded to 5 decimals. The forward points are about 40.4 pips.
Near leg: the company sells EUR and receives USD 10,000,000 × 1.0850 = USD 10,850,000.
Far leg: the company buys its EUR back and pays USD 10,000,000 × 1.08904 = USD 10,890,400.
Net cost in USD = 10,890,400 − 10,850,000 = USD 40,400.
Check with the points: 40.4 pips × EUR 10,000,000 × 0.0001 = USD 40,400, which matches. Without rounding the forward, the exact CIP cost is about USD 40,435 (10,000,000 × 0.0040435). If you round the forward to 1.0890 (40 pips), you get USD 40,000. The quoted precision changes the cost slightly.
The EUR amounts on the two legs are equal, so there is no net FX exposure. The company has its EUR back in 3 months. In the meantime it has used the EUR to raise USD, the higher-rate currency.
As a rate: USD 40,400 ÷ USD 10,850,000 = 0.3724% for 90 days. Annualised on ACT/360, that is 0.3724% × 360/90 ≈ 1.49%. This is close to the interest rate gap of 1.50% (4.00% − 2.50%). The company pays USD interest at about 4.00% on the USD it receives, and the EUR it hands over earns about 2.50%. The swap cost is the net of the two.

Answer: The company receives USD 10,850,000 now and pays USD 10,890,400 in 3 months to get its EUR 10,000,000 back. The net cost is USD 40,400 (about 40.4 pips on EUR 10,000,000). The exact unrounded CIP cost is about USD 40,435. The swap leaves no net FX exposure.

Exam tips

Write the pair as base/quote before touching any number. Most formula errors come from mixing up the two currencies.
Check the sign of the forward points against the interest rate gap before choosing an answer. This removes two options quickly.
Read whether the question gives rates or points, and the pip size for the pair. JPY questions use 0.01.
Know the difference between an outright forward (open position) and an FX swap (spot plus opposite forward, no net exposure). Conceptual questions often test this.
For two-way quotes, apply bid points to the bid and ask points to the ask. Then decide which side of the dealer's quote the client trades on.

Practice questions from Foreign Exchange Markets

Spot, Forward and Swap FX Transactions in other exams

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

CFA Level IIIFX Market Concepts and Currency Exposure

Spot, Forward and Swap FX Transactions: frequently asked questions

How do I calculate the forward exchange rate?

Use F = S × (1 + r_quote × d/basis_quote) ÷ (1 + r_base × d/basis_base), where rates are for the same period as the forward. Use 360 for both currencies only when both use a 360-day basis. S and F are quote currency per unit of base currency. If forward points are given, simply add them to spot after converting from pips.

What is the difference between an FX forward and an FX swap?

An outright forward is a single exchange on a future date and leaves you with an open currency position. An FX swap is two opposite exchanges, usually spot and forward, of the same notional. It leaves no net FX exposure and is used mainly for funding and rolling positions.

Why are forward points positive or negative?

They reflect the interest rate gap between the two currencies. The currency with the higher interest rate trades at a forward discount. The currency with the lower rate trades at a premium.

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

No. It is set by no-arbitrage with interest rates, as in covered interest parity. The future spot rate can end up above or below the forward.