Forward point in foreign exchange trading
When performing regular (spot) forex trading at most foreign exchange service providers, you are unlikely to encounter problems with the forward point. However, if you trade foreign exchange forward contracts, it is good to understand its operating mechanism. Whether it's a spot or a forward transaction, understanding the foreign exchange knowledge in this area will expand your overall understanding of the foreign exchange.
Compared with the spot exchange rate, the impact of interest rates on future exchange rate levels is reflected in the forward point, or the forward spread. The spot exchange rate plus or minus the forward point can get the forward exchange rate. The longer the forward contract is delivered, the greater the impact of the spreads of the two currencies traded.
Forward transactions are an important part of interbank currency transactions, but general retail traders are less likely to be exposed, as in most cases such traders are more concerned with spot exchange rates. As mentioned earlier, the forward exchange rate is derived from the spot exchange rate plus or minus the forward period, so the forward exchange rate will continue to change with the spot exchange rate and the interest rate of the short-term currency field. Interbank traders will negotiate a forward exchange rate for
, making both parties acceptable, so they will have to calculate the forward point. However, retail traders are subject to price and trade on the platform that provides forward foreign exchange trading, so the forward exchange rate is only the forward buy and sell price adjusted according to the spot exchange rate.
For a currency pair whose base currency rate is higher than the quoted currency rate, the forward point will be deducted from the spot exchange rate, so the forward exchange rate will be lower than the spot exchange rate. At this time, the base currency is “long-term discount”.
So it is obvious that for a currency pair whose base currency interest rate is lower than the quoted currency rate, the forward rate is added to the spot exchange rate, so the forward exchange rate will be higher than the spot exchange rate, which is called the base currency < ”.
Let's look at a simplified example: for example, if you want to trade Australia/US for 1 000 000, the forward settlement date is 6 months or 180 days after the execution of the transaction, as shown in the following table:
In order to calculate the forward exchange rate, We need to know the current spot exchange rate and the interest rates of Australia and the United States.
In this example:
Australian/US spot exchange rate = 1.062 5
Australian interest rate = 4.75%
Interest rate = 0.25%
Through the long-term impact of the budget rate on each currency, we can derive each of the spot transactions The future value of money. Therefore, we see that after 180 days, the assumed interest rate is 4.75% and the value of 1000 000 will be 1,023,424.66 Australian; the assumed interest rate is 0.25%, and the 1,062,500 US dollars will be worth 1,063,828.13.
Comparing these two figures, we can get the forward exchange rate. In fact, it is very simple, as long as the future US quantity is divided by the future Australian quantity (quote currency divided by the base currency): 1 063 828.13 ÷ l 023 424.66 = 1.089 5. This figure is the forward exchange rate after 6 months (180 days) of Australia/US.
In order to calculate the forward point, we only need to simply subtract the calculated forward exchange rate from the original spot exchange rate. In this example, the forward exchange rate is lower than the spot exchange rate, so the forward point is a negative number; in this case it is equal to -230 (10 395-10 625). Please note that for the sake of quotation, it is not represented by a decimal point. The forward exchange rate you will see later may be reflected in a way such as 1.039 5 or a -230.
It is important to remember that the forward exchange rate does not reflect the direction of one currency against another; they only reflect the time between the two currencies between the spot trading day and the forward delivery date. Spread impact.