How this calculator works
A forward exchange rate is the price agreed now for a currency exchange at a future date. The forward premium compares that rate with the spot rate. If the forward rate is higher, the currency trades at a forward premium; if it is lower, at a forward discount. A positive premium means the market expects, or at least is willing to pay for, the currency to strengthen, and it is also consistent with an interest rate differential under covered interest parity. Annualising makes contracts of different lengths comparable. The simple version scales the period premium by twelve divided by the number of months; the compound version compounds it, which differs more as the premium or the duration grows.
Formula
Forward premium = (F - S) / S, where F is the forward rate and S the spot rate. Simple annualised premium = forward premium x 12 / months. Compound annualised premium = (F / S)^(12 / months) - 1.
Worked example
A spot rate of 1.35 and a six-month forward rate of 1.37 give a forward premium of (1.37 - 1.35) / 1.35 = 1.4815%. The simple annualised premium is 1.4815% x 12 / 6 = 2.9630%, and the compound annualised figure is (1.37 / 1.35)^2 - 1 = 2.9849%.
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Frequently asked questions
What does a forward discount mean?
The forward rate is below the spot rate, so the result is negative. It implies the currency is expected to weaken over the contract period, or that its interest rate is higher than the other currency's under covered interest parity.
Which currency is the base?
The premium is measured in the quoted currency per unit of the base currency. Swapping the direction of the quote flips the sign and changes the magnitude, so state the quote convention when reporting a premium.
Why are there two annualised figures?
The simple version is the market convention for comparing short contracts. The compound version expresses the same change as an annual growth rate, which is the fairer comparison when the period is long.
Does the forward premium predict the future spot rate?
Not reliably. It reflects interest rate differentials and market pricing. Uncovered interest parity, which would make it an unbiased predictor, is not supported by most empirical tests.