How this instrument works
A forward premium takes a forward price and rewrites it as a single annualized percentage, letting a trader quote a currency's premium as one number regardless of whether the underlying contract runs thirty days or a full year. Two forwards priced at wildly different levels can carry the identical premium once annualized, and two forwards that look close on the screen can carry very different premiums if their maturities differ.
The formula does that in two moves. First, (F − S) ⁄ S turns the forward-minus-spot gap into a plain percentage move over the life of the contract, stripped of currency units. Second, multiplying by 360 ⁄ days stretches or compresses that percentage onto a full year, using the 360-day count that FX and money-market desks default to rather than a calendar year of 365. A 90-day contract's raw 1.8% gap becomes a 7.3% annualized premium once scaled this way — the same underlying quote, read on a common clock.
Because the scaling is mechanical, the premium says nothing about where the currency is actually headed; it only restates today's quoted forward and spot on an annualized basis. It also inherits the 360-day convention's own imprecision — a bond desk annualizing on an actual/365 basis will compute a slightly different percentage from the identical forward and spot pair, which is why a quoted premium should always be read alongside its day-count basis, not treated as a universal constant.
- Enter the Forward rate — the outright forward price quoted for the pair.
- Enter the Spot rate — today's live exchange rate for the same pair.
- Set Days to forward maturity — the actual calendar days until the contract settles.
- Read the Annualized forward premium, % readout — positive means the quoted currency sits at a premium forward, negative means a discount.
- Change Days to forward maturity alone to see how the same raw gap compresses or stretches once annualized.
Worked example — pricing a ninety-day currency forward's premium
A dealer quotes a ninety-day outright forward of 1.12 while the screen shows spot at 1.10. Subtracting gives 0.02, dividing by the 1.10 spot gives 0.018182, and that 1.82% is the entire move priced into the contract over its ninety days. The annualizing step multiplies by 360 divided by 90, which is exactly 4, turning 1.82% into the 7.27% the desk actually writes down as the forward premium.
Hold the maturity and spot fixed but drop the quoted forward to 1.08 instead of 1.12, and the sign flips: the same arithmetic now returns −7.27%, a forward discount rather than a premium. The magnitude of the move stayed put — only its direction reversed — which is why traders check the sign of this figure before its magnitude when comparing two currencies.
Questions
What does a positive forward premium actually mean?
It means the forward rate sits above the spot rate, so the quoted currency costs more to buy for future delivery than it does today. Under covered interest rate parity that gap tracks the interest rate difference between the two currencies, so a positive premium usually lines up with the quoted currency carrying a lower short-term interest rate than the other side of the pair, not with a market forecast that it will rise.
Why annualize on 360 days instead of the exact days in a year?
Because FX and money-market desks price short-term instruments on a 360-day count by convention, a holdover from how interbank deposits and forward points have long been quoted. It is not a universal rule — bond markets typically annualize on 365 — so the same forward and spot pair produces a slightly different annualized premium depending on which convention is applied, usually a difference of a few tenths of a percent.
Can I compare a 30-day premium against a 180-day one directly?
Yes, and that is the entire reason for annualizing in the first place. A thirty-day contract's raw price gap sits on a different scale than a hundred-eighty-day contract's raw gap, but once the formula stretches both onto the same 360-day basis, the two resulting percentages sit on one line and can be read side by side without adjustment.
Who reads a forward premium instead of just the forward rate?
Interbank FX traders comparing quoted currencies on one scale regardless of maturity, corporate treasurers explaining the annualized cost of a hedge to a finance committee, and financial journalists describing currency conditions in shorthand all use the premium figure. The forward rate itself, by contrast, is what actually gets dealt and settled — the premium is the summary statistic built on top of it.
Why does the 7.27% annualized figure look bigger than the actual move?
Because it has been stretched to a yearly pace, not because the currency moved that much. Over the ninety days in this example the contract only priced in a 1.82% shift; multiplying by four to reach a 360-day basis produces 7.27%. Reading the annualized number as the realized change on a short contract overstates what actually happened to the price by roughly four times.
References
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.