What Is a Forward Spread?
The forward spread is the difference between the forward exchange rate and the spot exchange rate. Expressed in premium, discount or parity. A premium indicates that the forward exchange rate is more expensive than the spot exchange rate, a discount indicates that the forward exchange rate is cheaper than the spot exchange rate, and a parity indicates that the two are equal. Because the exchange rate is priced differently, although the concepts of premium and discount are the same, the method of calculating the forward exchange rate based on the forward spread is also different. According to the direct price method, if the forward spread is discounted, the forward exchange rate is equal to the spot exchange rate minus the discount; if the forward spread is premium, the reverse is true. According to the indirect price method, if the forward spread is discounted, the forward exchange rate is the spot exchange rate plus discount; if the forward spread is premium, the reverse is true. [1]
Forward spread
Right!
- Chinese name
- Forward spread
- Make up
- Forward rate
- Types of
- Premium, discount, parity
- Method
- exchange rate
- The forward spread is the difference between the forward exchange rate and the spot exchange rate. Expressed in premium, discount or parity. A premium indicates that the forward exchange rate is more expensive than the spot exchange rate, a discount indicates that the forward exchange rate is cheaper than the spot exchange rate, and a parity indicates that the two are equal. Because the exchange rate is priced differently, although the concepts of premium and discount are the same, the method of calculating the forward exchange rate based on the forward spread is also different. According to the direct price method, if the forward spread is discounted, the forward exchange rate is equal to the spot exchange rate minus the discount; if the forward spread is premium, the reverse is true. According to the indirect price method, if the forward spread is discounted, the forward exchange rate is the spot exchange rate plus discount; if the forward spread is premium, the reverse is true. [1]
- Forward spreads are expressed using premiums, discounts, and parity. A premium indicates that the forward exchange rate is more expensive than the spot exchange rate; a discount indicates that the forward exchange rate is cheaper than the spot exchange rate; a parity indicates that the forward exchange rate is equal to the spot exchange rate. Because the exchange rate is marked differently, the method for calculating the forward exchange rate based on the forward spread is also different.