Forward Premium Calculator
Calculate the forward premium or discount between spot and forward currency exchange rates. Understand currency expectations and make informed trading decisions.
Currency Rates
Current market exchange rate
Agreed future exchange rate
Length of forward contract in months
Forward Premium Result
Enter spot rate, forward rate, and period to calculate the forward premium
What Is a Forward Premium?
A forward premium is the difference between what a currency is worth right now (spot rate) and what it will be worth in the future according to a forward contract. It's like betting on whether a currency will strengthen or weaken over time.
When you see a "premium," it means the forward rate is higher than the spot rate - the market expects that currency to appreciate. A "discount" means the opposite - the market expects depreciation.
Understanding forward premiums helps traders, businesses, and investors make smarter decisions about international payments, hedging strategies, and currency positioning.
Forward Premium Formula
Annualized Forward Premium Formula
Forward Premium (%) = [(Forward Rate − Spot Rate) ÷ Spot Rate] × (12 ÷ Months) × 100
This formula calculates the annualized premium or discount:
- • Positive result: Forward premium (currency expected to strengthen)
- • Negative result: Forward discount (currency expected to weaken)
- • Annualized: The × (12 ÷ Months) converts to yearly rate
Example: Spot = 82.00, Forward = 83.50, 6 months
Premium = [(83.50 − 82.00) ÷ 82.00] × (12 ÷ 6) × 100 = 3.66%
Forward Premium Examples
Currency Forward Calculations
| Currency Pair | Spot Rate | Forward Rate | Months | Premium |
|---|---|---|---|---|
| USD/INR | 82.00 | 83.50 | 6 | 3.66% |
| EUR/USD | 1.0850 | 1.0750 | 12 | -6.91% |
| GBP/USD | 1.2650 | 1.2750 | 3 | 7.89% |
Positive percentages show premiums (expected appreciation), negative show discounts (expected depreciation).
Forward Premium FAQs
What's the difference between spot and forward rates?
Spot rate is for immediate exchange. Forward rate is agreed today for exchange at a future date, incorporating market expectations.
Why annualize the premium?
Annualizing allows comparison across different contract lengths. A 3-month premium of 2% annualizes to about 8% per year.
What causes forward premiums?
Interest rate differentials, inflation expectations, political stability, and market sentiment all influence forward premiums.