π± Forward Premium Calculator
Annualized premium or discount on forwards.
Annualized forward premium
Estimates for planning only, not financial advice.
The forward premium is the annualized percent by which the forward rate exceeds the spot rate: the forward-spot difference over spot, scaled to a year. With spot at 1.0800, a 90-day forward at 1.0950, the 150-pip gap annualizes to +5.56%: the foreign currency trades at a forward premium. A negative number would be a forward discount.
How to Use This Calculator
Enter the spot rate, the outright forward rate for your tenor, and the days to settlement. The calculator returns the annualized premium or discount plus the pip difference.
Enter the spot rate in the same quotation as the forward.
Enter the outright forward rate and the days to settlement.
Read the annualized premium. For the fair forward behind it, use our forward rate calculator.
The Forward Premium Formula
The premium reflects the interest rate differential between the two currencies: the higher-yielding currency normally trades at a forward discount, the lower-yielding at a premium. That is covered interest parity doing its quiet work. Quotes in pips are the raw difference (150 pips here); annualizing turns it into a rate comparable across tenors. A 5.56% premium on a 90-day forward and a 5.56% premium on a 1-year forward mean the same yearly compensation for the rate gap.
Worked Example
Spot 1.0800, 90-day forward 1.0950. Difference: 0.0150, or 150 pips. Divide by spot: 0.0150 / 1.08 = 1.389%. Annualize: 1.389% x (360/90) = 5.56%. Now the discount case: forward at 1.0700 gives (1.07 - 1.08)/1.08 x 4 x 100 = -3.70%, a forward discount, meaning the market prices the base currency to weaken or the rate differential to favor it. Hedgers compare this premium against their own funding costs to decide whether hedging pays.
What the Premium Tells a Hedger
The premium is the price of certainty. An exporter locking in a forward at a 5.56% annualized premium earns that versus rolling spot, which usually mirrors the interest they would have earned holding the foreign currency. If your borrowing cost is below the premium, the hedge effectively pays you. Corporates hedge to kill volatility, not to win bets, but knowing the premium keeps treasury honest about the cost.
My practical note: compare premiums across tenors before choosing a hedge length. A steeply upward-sloping premium curve makes long hedges expensive; sometimes rolling short forwards costs less even with the extra effort. And always check the premium against covered interest parity with our interest rate parity calculator before assuming the quote is fair.
Estimates for planning only, not financial advice.
Frequently Asked Questions
What is a forward premium?
The annualized percent by which a forward exchange rate exceeds the spot rate. Positive means the foreign currency is priced richer forward than spot; negative is a forward discount. It mainly reflects the interest rate differential between the two currencies.
How do you annualize a forward premium?
Compute (F-S)/S as a percent, then multiply by 360/days. A 1.39% gap over 90 days annualizes to about 5.56%. Annualizing lets you compare premiums across different tenors.
What are pips in FX forwards?
The raw point difference between forward and spot, usually quoted in ten-thousandths. A move from 1.0800 to 1.0950 is 150 pips. Pips are the dealer quote; the annualized percent is the economic meaning.
Why does the higher-interest currency trade at a discount?
Covered interest parity: if it did not, you could borrow cheap, convert, invest at the higher rate, and lock in the forward for risk-free profit. The discount exactly offsets the rate advantage.
Forward premium vs interest rate differential?
They should match under covered interest parity. Persistent gaps signal arbitrage opportunities, capital controls, or credit and liquidity frictions, and they get traded away fast in major pairs.
Should a business care about the premium?
Yes, because it is the cost, or occasionally the income, of hedging. A treasurer comparing a forward hedge against leaving exposure open needs the premium to price the decision correctly.
What day-count do FX forwards use?
Typically 360 days for most pairs, 365 for sterling-involved crosses. The difference is small but real on long tenors, so match your calculator to market convention.
Can the forward premium predict spot moves?
No. The forward rate is not a forecast; it is an arbitrage price from interest differentials. Decades of research show forwards predict future spot poorly, often worse than assuming no change.
What is a forward discount?
A negative annualized premium: the forward rate sits below spot. It usually means the base currency carries the higher interest rate. Discounts are as normal as premiums; the sign just follows the rate differential.
How do forwards differ from futures?
Forwards are private OTC contracts customized to your date and size; futures are standardized exchange contracts with daily margining. Corporates hedging specific exposures use forwards; speculators and hedgers wanting liquidity use futures.