Forward Premium Calculator
Table of contents
What is forward premium?How to calculate forward premium and annualized forward premium — Forward premium formulaHow to interpret the currency forward premiumFAQsWith this forward premium calculator, you can easily calculate the forward premium and the annualized forward premium. This metric can help you analyze the future currency exchange rate trend. Please feel free to check out our forward rate calculator and risk calculator to understand more about this topic.
This article will help you understand what the forward premium is and how to calculate it using the forward premium formula. We will also demonstrate some calculation examples to help you understand the concept.
What is hedging?
Hedging is a form of risk management where the party eliminates the risks of huge losses at the expense of reducing some potential profits. Hedging is typically carried out by commodity producers such as crude oil companies.
What is foreign currency exposure?
Foreign currency exposure happens when a company has operations in other countries. For example, if a USbased company acquires a UKbased company and continues operating in the UK, the combined entity will have foreign currency exposure.
What is speculating?
Speculating is a form of earning profit by buying a financial instrument and hoping to sell it at a higher price in the future. Speculating also includes shorting financial instruments if one thinks the price will drop in the future. All in all, speculating is a dangerous way to trade by timing the market.
What is arbitrage?
Arbitrage is a way of earning riskfree profit by exploiting the mispricing of securities in different markets. This involves buying the instrument in one market and immediately selling it at a higher price in another market.
How can I calculate the forward premium?
You can calculate the forward premium in three steps:

Determine the spot rate.

Calculate the forward rate.

Apply the forward premium formula:
forward premium = (forward rate − spot rate) / spot rate
What is the annualized forward premium for a 5% 180day forward?
The annualized forward premium will be 10%
. You can calculate it by using this formula:
annualized forward premium = forward premium × (360 / days) = 5% × (360/180) = 10%
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