Under interest rate parity, the currency with the lower interest rate trades at a forward premium. Businesses use forwards to lock in exchange rates for future payments.
How to use the Forward Premium Calculator
- Spot rate
- Forward rate
- Forward contract duration
- Day count
Results update as you type, and every field accepts the units shown in its menu.
How it works
Enter the spot rate, the forward rate and the length of the forward contract in days.
Tips
- Use annualised volatility and interest rates as decimals per year.
- Remember that one standard option contract usually covers 100 shares.
- Options lose time value as expiry approaches – re-run the numbers as dates change.
- Derivatives can lose more than you expect; understand the maximum loss before trading.
Common mistakes to avoid
- Mixing days and years for time to expiry.
- Ignoring commissions and the bid–ask spread.
- Forgetting dividends when pricing options on dividend-paying stocks.
Inputs explained
| Field | What to enter |
|---|---|
| Spot rate | A number |
| Forward rate | A number |
| Forward contract duration | In days |
| Day count | Choose one: 360 days, 365 days |
What each result means
- Forward premium (period) = ([Forward rate] – [Spot rate])÷[Spot rate]×100
- Annualized forward premium = ([Forward rate] – [Spot rate])÷[Spot rate]×[Day count]÷[Forward contract duration]×100
Example values
How the main result changes when Spot rate changes and everything else stays at the example values above:
| Spot rate | Annualized forward premium (%) |
|---|---|
| 0.5425 | 202.581 |
| 0.8138 | 68.387 |
| 1.09 | 1.29 |
| 1.36 | -38.968 |
| 1.63 | -65.806 |
| 2.17 | -99.355 |
Formula
Forward premium = (forward rate − spot rate) ÷ spot rateAnnualized premium = premium × 360 ÷ daysWorked example
Inputs — Spot rate: 1.085; Forward rate: 1.092; Forward contract duration: 180 days; Day count: 360 days.
Results — Forward premium (period) = 0.645 %; Annualized forward premium = 1.29 %; Type = Premium.
Frequently asked questions
What is a forward premium?
When the forward rate is above the spot rate.
What causes it?
Interest rate differences between the two currencies.
What is a forward discount?
When the forward rate is below the spot rate.
What formula does the Forward Premium Calculator use?
Forward premium = (forward rate − spot rate) ÷ spot rate.