Pricing

The relationship between spot and forward is as follows:

F = S \left( \frac{1+r_1}{1+r_2}\right)^T

where:

* F = forward rate
* S = spot rate
* r1 = simple interest rate of the term currency
* r2 = simple interest rate of the base currency
* T = tenor (calculated according to the appropriate day count convention)

The forward points or swap points are quoted as the difference between forward and spot, F - S, and is expressed as the following:

F - S = S \left[ \left(\frac{1+r_1}{1+r_2}\right)^T -1 \right] \approx S \left( e^\left(\left(r_1 - r_2\right)T\right) - 1\right)

where r1 and r2 are small. Thus, the absolute value of the swap points increases when the interest rate differential gets larger, and vice versa.