Discount Spread

AAA

DEFINITION of 'Discount Spread'

Currency forward points that are subtracted from the spot rate, to obtain a forward rate for a currency. In the currency markets, forward spreads or points are two-way quotes, that is, they have a bid price and an offer price. In a discount spread, the bid price will be higher than the offer price, while in a premium spread, the bid price will be lower than the offer price.

INVESTOPEDIA EXPLAINS 'Discount Spread'

For example, assume a euro spot rate of EUR 1 = 1.4000 / 1.4002 USD, and that six-month interest rates for the euro are higher than for the USD. If the discount spread for six months is 25 / 24, the six-month euro rate will be EUR 1 = 1.3975 / 1.3978 (1.4000 - 0.0025 and 1.4002 - 0.0024).




RELATED TERMS
  1. Currency Forward

    A binding contract in the foreign exchange market that locks ...
  2. Spot Exchange Rate

    The rate of a foreign-exchange contract for immediate delivery. ...
  3. Forward Premium

    When dealing with foreign exchange (FX), a situation where the ...
  4. Forward Points

    The number of basis points added to or subtracted from the current ...
  5. Forward Discount

    In a foreign exchange situation where the domestic current spot ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the ...
RELATED FAQS
  1. What does "outrights" mean in the context of the FX market?

    The term "outrights" is used in the forex (FX) market to describe a type of transaction in which two parties agree to buy ... Read Full Answer >>
  2. What kinds of derivatives are types of forward commitments?

    A derivative is a type of security in which the price of the security is dependent on underlying assets. A derivative could ... Read Full Answer >>
  3. How do I calculate a forward rate in Excel?

    You need to have the zero-coupon yield curve information to calculate forward rates, even in Microsoft Excel. Once the spot ... Read Full Answer >>
  4. How valuable is the forward rate as an overall economic indicator?

    Any given forward rate is theoretically equal to its corresponding spot rate plus future expectations. Many investors and ... Read Full Answer >>
  5. How do I convert a spot rate to a forward rate?

    Think of the relationship between spot and forward rates in the same way as the relationship between discounted present value ... Read Full Answer >>
  6. How accurate is the forward rate in predicting interest rates?

    Forward rates are extremely limited predictors of actual interest rates. This isn't particularly surprising, given the multitude ... Read Full Answer >>
Related Articles
  1. Charts & Patterns

    Should Investors Get Into Oil Now?

    Oil has enjoyed a steady climb after a violent plunge. Where is it going next, and how can investors profit?
  2. Investing Basics

    Understanding Non-Deliverable Forward (NDF)

    A foreign exchange hedging strategy where the parties agree to settle the profit or loss in a foreign currency futures contract before the expiration date.
  3. Chart Advisor

    Trade Europe and a Strong USD with this ETF

    With ETFs is't now possible to construct a portfolio of European equities and simultaneously hedge the currency risk.
  4. Investing Basics

    What is a Forward Contract?

    A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.
  5. Bonds & Fixed Income

    Understanding Negative Rates Of Europe's Central Banks

    We are currently seeing negative central bank deposit rates and government and corporate bonds with negative yields, but there are investors buying into these securities. Why?
  6. Investing News

    Is A Greek Euro Exit Finally About To Happen?

    The Eurozone crisis involving Greece has been a nagging thorn in the side of the European Union ever since the financial collapse of 2008–2009.
  7. Economics

    Will Alex Tsipras Change The European Economy?

    A debt default and a Euro exit by Greece's leaders would likely cause more harm to Greece's economy than to the EU, of which Greece is just a small part.
  8. Economics

    Will The ECB's Quantitative Easing Sink The Euro?

    The European Central Bank is embarking on a trillion-euro QE program to revive the eurozone economy, and the euro currency is in free fall.
  9. Chart Advisor

    Trade A Surging U.S. Dollar With These 3 ETFs

    With ETFs it's now possible for the average trader to gain exposure to lucrative currency movements. Here are a few options to consider.
  10. Chart Advisor

    4 Currency ETFs On The Move

    The Bank of the Japan rocked the yen last week, but it isn't the only currency ETF to watch. Big moves are occurring throughout the forex market.

You May Also Like

Hot Definitions
  1. Fracking

    A slang term for hydraulic fracturing. Fracking refers to the procedure of creating fractures in rocks and rock formations ...
  2. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  3. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  4. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  5. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  6. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
Trading Center