Forward Premium Calculator

The forward premium measures the degree to which a forward exchange rate exceeds the current spot exchange rate. The core calculation involves determining the proportional difference between the two rates:

Forward Premium = (Forward Rate - Spot Rate) / Spot Rate

To make forward contracts of varying maturities comparable on an annual basis, finance professionals convert this figure into an annualized rate using a standard 360-day commercial year convention:

Annualized Forward Premium = Forward Premium × (360 / Forward Contract Duration)

If the resulting value is positive, the currency is at a forward premium; if negative, it trades at a forward discount.

Imagine you are managing an international transaction and analyze a currency pair with the following parameters:

• Spot Rate ($S$): $1.2500
• Forward Rate ($F$): $1.2700
• Contract Duration ($D$): 90 days

Step 1: Calculate the forward premium. Subtract the spot rate from the forward rate, then divide by the spot rate.
($1.2700 - $1.2500) / $1.2500 = 0.0200 / $1.2500 = 0.016

This means a periodic forward premium of 1.6%.

Step 2: Annualize the premium. Multiply the periodic premium by the ratio of 360 days to the contract duration.
0.016 × (360 / 90) = 0.016 × 4 = 0.064

The annualized forward premium is 6.4%, providing a clear picture of the currency's annual valuation trend.

• Watch the Day Count Convention: Many financial markets utilize a 360-day year, while others may use 365 days. Always ensure your duration matches the market standard you are trading in.
• Interest Rate Parity: In theory, the forward premium or discount should roughly equal the interest rate differential between the two countries. Comparing calculated premiums against expected interest rates helps spot mispricings.
• Monitor Volatility: Exchange rates fluctuate rapidly. Use up-to-the-minute spot and forward quotes to ensure your premium calculations reflect active market conditions.