Forward Premium Calculator

The Forward Premium Calculator measures how far a currency forward rate is above or below the current spot rate, then annualizes that difference using a 360-day convention. It is designed for foreign-exchange quotes where the spot rate and forward rate are stated in the same direction, such as EUR/USD with EUR/USD or GBP/EUR with GBP/EUR. If the forward rate is higher than spot, the calculator labels the period result a premium. If the forward rate is lower, it labels the result a discount. If the rates are identical, the relationship is at parity.

This page is for quote interpretation, hedge comparison, and treasury review. It does not price the forward from interest rates; for that, use the forward rate calculator. To compare the financing side of a hedge, the interest calculator and compound interest calculator can help you test rate assumptions. When the forward is part of a broader cash plan, the budget calculator gives the premium or discount a place in operating forecasts.

Calculation

The form has three inputs: spot rate, forward rate, and forward contract duration in days. All three numbers must be positive. The calculator then calculates the period premium as forward minus spot, divided by spot. It annualizes by multiplying that period premium by 360 divided by the number of contract days. It also reports forward points as the raw forward minus spot spread.

The main result is the period premium, not the annualized number. That is why the default example shows a small headline percentage and a larger annualized figure. The annualized line is useful for comparing contracts with different maturities, but the period result is the actual percentage difference embedded in the quoted contract.

Formula

The period forward premium is:

$\text{forward premium} = \frac{\text{forward rate} - \text{spot rate}}{\text{spot rate}}$

The annualized premium in this calculator is:

$\text{annualized forward premium} = \text{forward premium} \times \frac{360}{\text{contract days}}$

Forward points are the unscaled rate difference:

$\text{forward points} = \text{forward rate} - \text{spot rate}$

The displayed percentage is the decimal ratio shown above multiplied by 100.

This calculator-defined scenario is not a rule, standard, legal conclusion, forecast, or universal convention.

Worked example using the defaults

The default spot rate is 1.1859, the default forward rate is 1.1885, and the default contract duration is 90 days. The forward points are 1.1885 minus 1.1859, or 0.0026.

$\text{forward premium} = \frac{1.1885 - 1.1859}{1.1859} = 0.00219243$

Displayed as a percentage, the period premium is about 0.22%. Annualization uses a 360-day year:

$\text{annualized forward premium} = 0.00219243 \times \frac{360}{90} = 0.00876971$

Displayed as a percentage, the annualized forward premium is about 0.88%. The result panel also states that the forward rate is about 0.22% above the spot rate over 90 days. If the forward rate were 1.1800 instead, the same formula would produce a negative result and the interface would describe it as a forward discount.

How to use the result

Corporate treasury teams use the forward premium to compare hedge quotes. A 30-day forward and a 180-day forward may have very different period premiums, so annualization puts them on a common scale. Importers and exporters use the period result to understand how much the contracted rate differs from spot before deciding whether the certainty of a forward contract is worth the cost or opportunity cost. Investors use the calculation to interpret currency-hedged returns and to separate spot movement from hedge carry.

The quote direction matters. Suppose a U.S. company looks at EUR/USD and sees a forward premium. That statement means the euro costs more dollars forward than spot. If someone flips the quote to USD/EUR, the sign can change because the reciprocal rate moves in the opposite direction. The calculator cannot infer the quote convention; it simply compares the numbers you enter.

Caveats and interpretation

A forward premium is not free money. Under covered interest parity, forward rates are closely linked to interest-rate differentials, though actual market quotes also reflect funding, collateral, liquidity, dealer spreads, and credit conditions. A premium in one quote direction often corresponds to a discount in the reciprocal direction. The annualized premium should not be compared blindly with bond yields unless day-count conventions, compounding, credit risk, and transaction costs are aligned.

The 360-day convention is another practical caveat. The calculator follows the form help exactly and uses 360 divided by contract days. Some performance reports prefer 365 days, especially outside money markets. For a 90-day contract, using 365 instead of 360 would slightly increase the annualized number. The period premium remains unchanged either way.

Use the output as a clean quote diagnostic. If a dealer quote looks inconsistent, recheck the quote direction, decimal placement, forward points convention, and settlement date. If the forward premium is part of an investment decision, pair it with interest-rate analysis, expected cash flows, and risk limits rather than treating it as a standalone forecast.

Sources

• Corporate Finance Institute, Forward Premium — definition of forward premium and discount in currency markets.
• Corporate Finance Institute, Forward Rate — explanation of forward exchange rates and spot-forward relationships.