How do I calculate FX forward points and what do they tell me?

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AcadiFi · Accepted Answer

Forward points are just the difference between the forward rate and the spot rate, scaled by convention. They exist because spot moves around all day while the interest rate differential is relatively stable, so points are a cleaner quote.

For AUD/USD with spot at 0.6485 and a 6-month outright forward at 0.6452, the forward points are (0.6452 − 0.6485) × 10,000 = −33 points (negative because AUD is trading at a forward discount). Forward points are usually quoted in 'pips' — the fourth decimal place for most pairs, second decimal for JPY pairs.

To get the outright forward back from points: F = Spot + (Points / 10,000). If Tasman Metals sees spot at 0.6485 and the dealer quotes 6-month points at −33, the outright forward is 0.6452.

The economic content of forward points is the interest rate differential (via CIP). For AUD/USD with USD rate 5.30% and AUD rate 4.45% over 6 months: F ≈ 0.6485 × (1 + 0.0445 × 180/360) / (1 + 0.0530 × 180/360) = 0.6458. Close to the observed forward; small deviation reflects CIP basis and term structure nuances.

Negative points (base currency at discount) means the base-currency interest rate is higher than the quote currency's. Positive points mean the base earns less. Traders watch forward points to infer relative funding costs, cross-border capital flows, and end-of-quarter balance sheet stress. A sudden widening of points often signals funding pressure long before headline rates move.

How do I calculate FX forward points and what do they tell me?

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