Forward Points

A forward point is the difference between the forward price of an asset and its spot price. Forward points are used to calculate the forward price of an asset, which is the price at which an asset will be delivered in the future.

The forward price of an asset is calculated by adding the forward points to the spot price. Forward points are positive when the forward price is higher than the spot price, and negative when the forward price is lower than the spot price.

Forward points are used to hedge against the risk of changes in the price of an asset. For example, a company that imports goods from another country may use forward points to hedge against the risk of the dollar rising in value against the currency of the exporting country. By buying forward points, the company can lock in a price for the goods that it will import, regardless of how the exchange rate changes.

Forward points are also used to speculate on the future price of an asset. For example, an investor who believes that the price of gold will rise in the future may buy forward points on gold. If the price of gold does rise, the investor will make a profit on the forward points.

Forward points are calculated using a number of factors, including the interest rate, the volatility of the asset, and the time to maturity of the forward contract. The interest rate is used to calculate the cost of carry, which is the cost of holding an asset over time. The volatility of the asset is used to calculate the risk premium, which is the additional return that an investor requires to compensate for the risk of holding the asset. The time to maturity of the forward contract is used to calculate the time value of money, which is the difference between the present value and the future value of an asset.

Forward points are an important tool for financial risk management and speculation. By understanding how forward points are calculated, investors can make informed decisions about how to use them to manage their risk and achieve their investment goals.