The forward exchange rate differs from today’s spot rate because of the interest rate gap between the two currencies — not because of a fee, a hidden margin or a forecast. When you fix a rate for a future date, that gap is added to or taken away from the spot rate as “forward points”. The result can be more or less favourable than spot.
This catches out many people buying property abroad or paying an overseas supplier. They see a broker quote a six-month rate that is not the same number they read on the news and assume they are being penalised for locking in early. In most cases the difference is pure interest rate mathematics, and it is the same for every provider quoting the same delivery date.
What is the difference between the spot rate and the forward rate?
The spot rate is the exchange rate for a transaction that settles almost immediately, normally within two working days. The forward rate is the rate agreed today for a transaction that settles on a set future date, up to 12 months ahead through a specialist broker.
Both rates exist at the same moment. The spot rate answers “what is one pound worth today?”; the forward rate answers “what will one pound buy on an agreed date months from now, priced today?”. You can compare the two live using our currency converter for spot and the GBP/EUR forecast pages for context on where a pair has been trading.
Why is the forward rate different from the spot rate?
The forward rate is different because holding two currencies over the same period earns two different interest rates. If you could buy a currency now, earn its interest until the future date, and lock in a forward sale at a rate that ignored that interest, you could make a risk-free profit. Markets close that gap by pricing the forward rate off the interest rate differential between the two currencies.
This relationship is known as covered interest parity. The currency with the higher interest rate trades at a forward discount (its forward rate is weaker than spot), and the currency with the lower interest rate trades at a forward premium. In practice the relationship holds very closely, though since the 2008 financial crisis a small residual gap — the “cross-currency basis” — can remain, as documented by the Bank for International Settlements.
For GBP/EUR, the differential is driven by the gap between the Bank of England’s Bank Rate and the European Central Bank’s key interest rates. When those two rates move relative to each other, the forward points change — which is why the forward rate you are quoted shifts over time rather than staying fixed.
What are forward points, and are they a fee?
Forward points are the amount added to or subtracted from the spot rate to arrive at the forward rate. They are the market’s expression of the interest rate differential over the period you are fixing, expressed in the fourth decimal place of the rate.
Forward points are not a fee and not the broker’s charge. They are a market-wide adjustment that applies to everyone quoting the same delivery date. The provider’s actual charge is a separate margin built into the rate, which is where the cost of the transaction lives. Keeping those two things apart is the key to reading a forward quote correctly.
When is a forward rate better than the spot rate?
A forward rate can be more favourable than spot when you are buying a currency whose interest rates are lower than sterling’s. In that case sterling sits at a forward premium and each pound buys more of the foreign currency on the future date than it would today.
The reverse is also true. When you are buying a currency whose interest rates are higher than sterling’s, sterling sits at a forward discount and each pound buys less on the future date. So fixing a rate for delivery in six or twelve months is not automatically a cost — depending on which way the interest rate gap points, the forward rate could work in your favour.
| Scenario (buying euros with pounds) | Interest rates | Forward points | Forward rate vs spot | Effect for a UK buyer |
|---|---|---|---|---|
| Sterling rates higher than euro rates | UK > euro area | Subtracted from spot | Forward rate lower (forward discount) | Fewer euros per pound on the future date |
| Sterling rates lower than euro rates | UK < euro area | Added to spot | Forward rate higher (forward premium) | More euros per pound on the future date |
| Rates broadly equal | UK ≈ euro area | Close to zero | Forward rate close to spot | Little difference either way |
How does the interest rate gap change a £400,000 forward?
Take a buyer converting £400,000 into euros for a property purchase in twelve months, at an illustrative spot rate of 1.17. The figures below use round, illustrative interest rates to show the mechanism — they are not current rates, and the live picture will differ.
If sterling interest rates are two percentage points above euro rates, the twelve-month forward works out at roughly 1.1475. That converts to about €459,000, compared with €468,000 at the spot rate of 1.17 — around €9,000 fewer euros. This is the forward discount, and it is not a penalty: the sterling you hold until settlement is, in effect, earning the higher UK interest that offsets it.
If euro interest rates are two percentage points above sterling rates, the same twelve-month forward works out at roughly 1.1929 — about €477,000, or around €9,000 more euros than spot. Same transaction, opposite outcome, driven entirely by which way the interest rate gap points.
The lesson is that the forward points are dwarfed in importance by the two things you can actually control: the margin built into your rate, and protecting the sterling value of a payment you have already committed to. For a step-by-step look at fixing a rate, see our guide to fixing an exchange rate for a future payment.
Does the forward rate predict where the exchange rate is going?
No. This is the most common misconception about forward pricing. The forward rate is not a forecast, and a forward discount does not mean the market expects the currency to fall. The forward rate is a mathematical consequence of today’s interest rates, set to remove arbitrage — nothing more.
Where a pair actually trades in the future depends on economic data, central bank decisions and market sentiment, none of which the forward rate claims to know. If you want a view on the outlook rather than the maths of a fixed rate, our currency forecast pages set out the drivers, while the decision of whether to fix now is covered in lock in an exchange rate now or wait.
What actually costs you money on a forward contract?
Three things determine what a forward really costs, and the forward points are the least of them. The margin in your rate is the provider’s charge. A deposit is usually required to open the contract, and if the market moves against your position before settlement you may face a margin call — explained in our guide to whether you pay a deposit for a forward contract.
The third factor is certainty. A forward removes the risk that the rate moves against you between agreeing a purchase and paying for it — the reason businesses use them to set a budget rate and plan with confidence. Whether that certainty is worth more than the flexibility of waiting is the real decision, and it is separate from the forward points. Our comparison of the spot rate versus a forward contract weighs the two.
Common mistakes when comparing a forward rate to the spot rate
- Treating a forward discount as a fee. The forward points reflect interest rates, not a charge. The charge is the margin, which sits on top and is easy to miss.
- Comparing a forward quote to the mid-market spot rate. The rate on the news is the mid-market rate, before any margin. Compare like with like: a dealt forward rate against a dealt spot rate from the same provider.
- Assuming the forward rate is a prediction. It is not a signal about where the pair is heading.
- Shopping two forward quotes with different delivery dates. A longer date carries more forward points, so the rates are not directly comparable unless the settlement dates match.
- Ignoring the deposit and margin call. A forward ties up cash, and an adverse move can trigger a top-up before settlement.
How does a specialist broker quote a forward rate?
At Cambridge Currencies, forward contracts are arranged over the phone with a dedicated specialist who explains how the forward points and the margin combine into the rate you are quoted, so there are no surprises at settlement. Contracts can fix a rate up to 12 months ahead, with a minimum transfer of £5,000.
Funds are safeguarded by our FCA-regulated e-money partners, Currencycloud and ScioPay, at a credit institution — the detail is set out on our safeguarding funds page. The same forward mechanism applies whether you are sending money to Spain for a property purchase or funding another commitment abroad.
Frequently asked questions
Is the forward rate higher or lower than the spot rate?
It depends on the interest rate gap. If you are buying a currency with lower interest rates than sterling, the forward rate is usually higher than spot (a forward premium). If its rates are higher, the forward rate is usually lower than spot (a forward discount).
Do I pay extra for a forward rate compared with spot?
The difference between the forward and spot rate is the interest rate differential, not an extra fee. The cost of the transaction is the margin built into the rate, which is separate. A forward can even give a more favourable rate than spot when sterling is at a forward premium against the currency you are buying.
Why has my forward rate changed since I last checked?
The forward rate moves with both the spot rate and the interest rate differential. When the Bank of England or the European Central Bank changes rates, or markets reprice expectations, the forward points shift, so a quote from last week may not match today’s.
How far ahead can I fix a forward rate?
Through a specialist broker, a deliverable forward contract can fix a rate up to 12 months ahead. Deliverable forwards used for a genuine commercial purpose are treated differently from investment derivatives under FCA guidance in PERG 13.4.
Is the forward rate the same at every provider?
The forward points are effectively the same market-wide for a given delivery date, because they come from interest rates. What differs between providers is the margin added to the rate and the terms of the contract, such as the deposit and how margin calls are handled.
Should I use a forward or wait and buy at spot later?
That is a question of certainty versus flexibility, not of the forward points. A forward removes exchange rate risk on a payment you have committed to; waiting keeps your options open but leaves the rate exposed. Speaking to a specialist about your specific timeline and amount is the best way to weigh the two.
Planning a large transfer and want to understand exactly how the forward points and the margin combine in your quote? Request a currency quote and talk it through with a Cambridge Currencies specialist by phone. For related reading, see our guides to how forward contracts work, the live GBP to EUR rate, and sending money to the USA.
