The points on a forward rate quote are the differences between the spot exchange rate quote and the forward exchange rate quote. These points are scaled such that they can have a relation to the last decimal in the spot quote. It is of great importance to note that forward quotations are displayed as the number of forward points at each maturity. Swap points also express forward points.
Finding Forward Points
To convert forward quotations expressed on a point basis or in percentage terms into an outright forward quotation, we are going to use an example of RUB/CNY from the following table of maturity and forward or spot rate points.
|Maturity||Spot rate or forward points|
The task is, therefore, to divide the number of points by 10,000 in order to scale down the fourth decimal place that is in the spot rate.
We can take the case of the six-month forward rate. Here we have:
1.6459 + -12.7/10,000 = 1.6459 – 0.00127 = 1.64463
Often, the forward rate is represented as a percentage of the spot and not as an absolute number of points. As such, the six-month forward rate for RUB/CNY can be shown as:
((1.6459 – 0.00127) / 1.6459 ) – 1 = -0.001%
To convert this percentage into a forward rate, we simply need to multiply the spot rate by one plus the percentage forward premium or discount:
1.6459 × (1 + (-0.001)) = 1.6459 × (1 – 0.001) = 1.6459 × 0.999 = 1.6443
Using the table of maturity and forward points or spot rate below, calculate the three-month forward rate.
Maturity Spot rate or forward points Spot 1.6459 One week -0.2 One month -1.0 Three months -5.6 Six months -12.7 Twelve months -25.3
The correct answer is A.
When we multiply the forward points of -5.6 by 10,000, we get –0.00056. The next step is to subtract this from our spot rate of 1.6459 which will lead us to a result of 1.64534.
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Convert forward quotations expressed on a points basis or in percentage terms into an outright forward quotation