Forward Premium

What is a 'Forward Premium'

A forward premium is when dealing with foreign exchange (FX), a situation where the spot futures exchange rate, with respect to the domestic currency, is trading at a higher spot exchange rate then it is currently. A forward premium is frequently measured as the difference between the current spot rate and the forward rate, but any expected future exchange rate will suffice.

BREAKING DOWN 'Forward Premium'

It is a reasonable assumption to make that the future spot rate will be equal to the current futures rate. According to the forward expectation's theory of exchange rates, the current spot futures rate will be the future spot rate. This theory is routed in empirical studies and is a reasonable assumption to make in the long term.

RELATED TERMS
  1. Forward Discount

    In a foreign exchange situation where the domestic current spot ...
  2. Forward Margin

    The difference between the spot rate and the estimated future ...
  3. Interest Rate Parity

    A theory in which the interest rate differential between two ...
  4. Forward Points

    The number of basis points added to or subtracted from the current ...
  5. Forex Spot Rate

    The current exchange rate at which a currency pair can be bought ...
  6. Currency Forward

    A binding contract in the foreign exchange market that locks ...
Related Articles
  1. Investing Basics

    Explaining the Spot Rate

    The spot rate is the immediate purchase price posted on exchanges for purchasing commodities, currency and securities.
  2. Forex Education

    How To Lock In An Exchange Rate

    Currency risk can be effectively hedged by locking in an exchange rate through the use of currency futures, forwards, options, or exchange-traded funds.
  3. Forex Education

    Forex Tutorial: What is Forex Trading?

    What Is Forex?The foreign exchange market is the "place" where currencies are traded. Currencies are important to most people around the world, whether they realize it or not, because currencies ...
  4. Professionals

    Forward Market Calculations

    CFA Level 1 - Forward Market Calculations. Learn how to calculate spreads on forward currency quotations. Shows the calculations behind annualized forward discounts and premiums.
  5. Forex

    Trading Currencies

    Currencies are traded around the world. Learn how to get in.
  6. Economics

    Macroeconomics: Currency

    By Stephen Simpson For citizens of different countries to conduct trade, they have to buy and sell each other's currencies. The price of a nation's currency, expressed as an amount of a second ...
  7. Professionals

    Forward Rates vs Spot Rates

    CFA Level 1 - Forward Rates vs Spot Rates. Learn how to convert spot rates to forward rates and vice versa. Provides many sample calculations on the conversions.
  8. Investing Basics

    Understanding the Spot Market

    A spot market is a market where a commodity or security is bought or sold and then delivered immediately.
  9. Forex Strategies

    The Money Market Hedge: How It Works

    Investopedia explains how to hedge foreign exchange risk using the money market, the financial market in which highly liquid and short-term instruments like Treasury bills, bankers’ acceptances ...
  10. Professionals

    Fundamental Differences Between Futures and Forwards

    CFA Level 1 - Fundamental Differences Between Futures and Forwards. Learn the fundamental differences between futures and forward contracts. Contrasts how and where they trade and discusses marking ...
RELATED FAQS
  1. How is a share premium account taxed?

    Understand the difference between a spot rate and forward rate. Learn why someone would enter into a contract with a spot ... Read Answer >>
  2. How do I convert a spot rate to a forward rate?

    Learn how to convert spot rates to forward rates for financial transactions agreed to today but not to be executed until ... Read Answer >>
  3. What is the difference between a forward rate and a spot rate?

    Learn about spot and forward contracts, how spot and forward rates are used for spot and forward contracts, and the difference ... Read Answer >>
  4. What are some securities that have spot rates?

    Learn about the types of assets that have spot rates, and understand how the spot rate is used to determine the fair market ... Read Answer >>
  5. Over what time period should I be looking at the forward rate?

    Read about forward rates and forward prices, how they function, and which rates you should look at based on your own investment ... Read Answer >>
  6. How valuable is the forward rate as an overall economic indicator?

    Find out why the forward rate is considered an important economic indicator, the logic behind this consideration and possible ... Read Answer >>
Hot Definitions
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center