Let's look at how forward prices are quoted in the FX markets. Generally, the market doesn't quote the actual forward prices directly. Instead, quotes are expressed using forward points, which represent the adjustments needed to move from the spot FX rate to the forward rate. While this may seem unintuitive at first, the logic will become clearer as we dive into an example.

Take a look at the table on the screen, which displays FX spot prices and forward points for different currency pairs. Euro Dollar, British Pounds Dollar and Dollar Yen. Let's focus on the six month Euro US Dollar forward as an example. The spot price for Euro Dollar is quoted at 1.0950 on the bid and 1.0953 on the ask. While the six month forward points are quoted at 89.10 on the bid and 89.60 on the ask. These forward points are clearly not the forward exchange rate since they are so different from the spot rates. But instead they indicate how much the spot rate must be adjusted to determine the forward price. However, before we dive into the calculation, there's two key aspects of interpreting forward points that we need to be aware of.

First, the scaling factor. This reflects how we apply the forward points to the exchange rate, and it depends on the currency pair. For Euro, US Dollar forward points are divided by a scaling factor of 10,000, because one pip or point equals one 10,000th of a US Dollar. The fifth significant figure in the exchange rate quotation. In contrast, the US Dollar Japanese Yen where one pip equals one 100th for the Yen forward points are divided by a scaling factor of 100. So it's important to be clear about the scaling factor specific to the currency pair you are analyzing.

Second is the direction of adjustment, and this is pretty intuitive since the general rule is that if the forward points are positive, you add them to the spot rates and if they are negative, you subtract them.

Now let's apply these principles to calculate the six month Euro US Dollar forward bid price. The first step is to scale the forward points for Euro US Dollar. One pip equals one 10,000th of a US Dollar, so we divide the forward points by 10,000 for the bid price. Dividing 89.10 by 10,000 gives us 0.00891. This is the amount by which the spot price actually needs to be adjusted to get to the outright forward price.

So next, we need to adjust the spot price by adding the scaled forward points for the bid price. We take the spot price of 1.0950 and add 0.00891, which gives us a six month forward bid price of 1.10391. The same process applies to the ask price using the corresponding forward points.

Now let's take US Dollar Japanese Yen bid price as another example. Pause the recording and have a go yourself if you're feeling confident. The six month forward points are quoted as negative 426.26 on the bid and negative 425.41 on the ask. These negative values mean the forward rate is lower than the spot rate, so we subtract the scaled forward points from the spot rate. For the bid price, the scaled forward points are 4.2626. Since we need to divide the forward points by 100 for US Dollar Japanese Yen. And this needs to be subtracted from the spot rate of 149.04, giving us a six month forward bid price of 144.78. But what happens if you come across a legacy system that only shows absolute values for forward points without any positive or negative signs? In such cases, you can determine whether to add or subtract the forward points by comparing the bid and ask values. The bid ask spread is always wider for the forward rates than the spot rate, so if the bid forward points are smaller than the ask you, add the points to the spot rates. If the bid forward points are larger than the ask you subtract them. For example, in the US Dollar, Japanese Yen six month forward, if the system only shows absolute values, the forward points are 426.26 on the bid, and 425.41 on the ask. Since the bid is larger than the ask, you need to subtract the forward points from the spot rate to calculate the forward price.