Overview

The forward rate is different than the spot rate and depends on the spot rate, interest rate and number of days between the current day and the Value Date. Forward rates are displayed with 2 more digits after the decimal than spot rates.

Note: If a forward position has not been closed by the end of the Value Date, then the forward will expire and be closed automatically at the end of the trading day. The P/L will be added to the account balance.

The Spot Rate is modified by a new component in the price, the Swap Rate. The Swap Rate is added to the Spot Rate in order to calculate the Forward Rate.

Forward Rate Formula

Buying a forward instrument:

Selling a forward instrument:

where

____ = Swap Rate

n = Number of calendar days between the current day and the end of the value day

R = Resulting % rate (the difference between the annual % rates of the two currencies, adjusted by +/- % spreads)

Clarification and Examples

Every Forex forward trade actually consists of two operations: Buying one currency and selling another currency:

BUY EURUSD means: BUY EUR / SELL USD

SELL EURUSD means: SELL EUR / BUY USD.

Annual % rates. For the purpose of forward interest rate calculation:

The annual rate of the bought currency is taken with the positive sign. This is what the trader receives. The annual rate of the sold currency is taken with the negative sign. This is what the trader pays.

Spreads +/- %. The purpose of the % spread is to decrease the rate that the trader receives and to increase the rate that the trader pays. Thus the % spread is subtracted from the annual rate that the trader receives, and added to the annual rate that the trader pays.

Example 1: Calculating the Resulting Rate (R)

The 1-month spread for EUR and for USD is 0.15%

EUR annual rate = 4.25%

USD annual rate = 2.00%

Example 1a: The trader BUYS EUR / SELLS USD:

For EUR, take . Trader receives 4.10%, less than the annual 4.25%.

For USD, take . Trader pays 2.15%, more than the annual 2.00%.

The resulting rate (R) is . Positive result, the Trader receives.

Example 1b: The trader SELLS EUR/ BUYS USD:

For EUR, take . Trader pays 4.40%, more than the annual 4.25%.

For USD, take . Trader receives 1.85%, less than the annual 2.00%.

The resulting rate (R) is . Negative result, the Trader pays.

Applying % spreads from the table:

1) | If the time difference between the current day and the end of the value date is less than or equal to the time interval specified in the table, the % spread specified for this interval is used; |

2) | If the time difference between the current day and the end of the value date is larger than the time interval specified in the table, the % spread specified for the next interval is used. |

3) | If there is no % spread specified for a given interval, the system will attempt to use the % spread from the nearest later interval. If no such spread is available, then the latest value date will be constrained by the nearest available % spread. |

Example 2: Calculating the Swap % Rate

Swap % rate formula:

Today is Wednesday September 03, time is 16:00

Value Date = October 1 (less than 1 calendar Month):

n = 27 (27 calendar days until the value date)

If we BUY EUR/ SELL USD:

R = + 1.95%

If we SELL EUR/ BUY USD:

R = - 2.55 %

Example 3: Calculating the Swap Rate to get the Forward Rate

Current spot price for EURUSD: BID 1.4570 / 1.4575 ASK

Example 3a: BUY EUR / SELL USD (Using ASK price of 1.4575)

Swap Rate: 0.14625% of Ask rate of 1.4575 = 0.002132

Trader Receives, meaning he buys lower; This means the swap rate is subtracted from the ASK price.

Example 3b: SELL EUR / BUY USD (Using BID price of 1.4570)

Swap Rate: - 0.19125% of Bid rate of 1.4570 = - 0.002787.

Trader Pays, meaning he sells lower; This means the swap rate is subtracted from the BID price.