Pricing
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)](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_tjP9Uiue6mwUVpGBd5mEPGqnJq5lliiuQRlTNl1t13dAEFBi0ac30CTzWOLoMmIB13UxsKlWSsr1Z_6ZbI9jmgHGLnJQPUOGqs3dwyh8boJdWOHEVt8mMu9Do6A6xJLpPQWjgsQO6OPuZALiJ_XA=s0-d)
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.
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