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Forward points

The number of pips added to or subtracted from the spot rate to reach a forward rate, determined by the interest rate gap between the two currencies.

Forward points are not a prediction of where the rate is going. They are a no-arbitrage adjustment: if you could earn more interest holding one currency than the other, the forward price must offset that advantage or riskless profit would exist. See interest-rate-parity.

The currency with the lower interest rate trades at a forward-premium; the higher-yielding one trades at a discount. Points are quoted per tenor and change with rate expectations.

Example: spot USD/JPY 151.90, US rates 5.0%, Japanese rates 0.3%. Over three months the 4.7% gap implies roughly 151.90 x 0.047 x 0.25 = 1.79 yen, so three-month forward points are about minus 179 and the outright is 150.11.

Related: fx-forward, forward-premium, interest-rate-parity, interest-rate-differential

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