Spot vs Forward
Spot rate or forward rate: pay at today’s price, or fix the rate for the payment date?
Spot means buying at today’s rate. A forward fixes a rate now for a date in the future. The choice decides your cost in pounds.
Say you owe a supplier €600,000 in six months. At an illustrative GBP/EUR rate of 1.1700, checked as this page was built, that bill is about £512,800 today. It is fixed in euros. It is not fixed in pounds until you buy the currency.
If sterling falls 2% before you pay, the rate moves to about 1.1466 and the same €600,000 costs about £523,300. That is roughly £10,500 more, for a bill you have not changed.
You have two ways to handle it. Spot means you buy the euros now at today’s live price. A forward means you agree today the rate you will get on the payment date, and settle later.
The same decision runs in reverse if you are owed foreign money. An exporter due €600,000 in six months faces the identical choice, except the risk is sterling strengthening, so the euros buy fewer pounds, and the forward is a sell rather than a buy. We pick up that mirror in full further down.
Currency Expert compares providers, recommends a fit and introduces you. We do not execute transfers or hold client funds. This page owns one question: pay now, or fix the rate for later.
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Two different costs: the move you might suffer, and the certainty you pay for
Two numbers on this page land close together. One is a risk. The other is the price of removing it.
It is worth separating those two numbers before the maths starts, because they are easy to blur on this example and they mean different things.
Leaving the position open carries a cost you might incur. On this bill, that is about £10,500 if sterling falls 2%. It could also be nothing, or a gain, if sterling holds or rises.
Fixing the rate carries a cost you will incur. Here it is about £10,000 more to buy the euros forward, with the working shown below. You pay it whatever the market then does.
The near-equality is not a coincidence, and it is not the forward pricing in your expected loss. Both numbers descend from the same 2%.
The assumed adverse move is 2%. The interest-rate gap driving the forward is also about 2%, four minus two, so a one-year forward near 1.1475 sits almost exactly where a 2% fall would land, about 1.1466.
The natural misread is that the forward is priced to match your likely loss, and so fairly compensates you for the risk. It does not.
The forward is the interest-rate gap and nothing else. It would sit in the same place even if every forecaster expected sterling to rise. The full working, and where this argument gets used on you, is in the forward-points section below.
What the spot rate is, and why ‘today’ does not mean same-day
The live ‘today’ price is your benchmark. It is also not the day your money arrives.
The spot rate is the live market price for near-immediate delivery, the ‘today’ rate every other quote is measured against. Without the live mid-market spot, you cannot tell whether a forward quote is fair or how much of it is the provider’s margin.
So the spot rate is not only a price you might trade at. It is your reference point. A forward quote means little until you can see the spot it was built from.
Spot is also not literally instant. It settles T+2, two business days after you deal, and some pairs such as USD/CAD settle T+1. For most payments that timing is fine.
It stops being fine when someone needs cleared funds today. If a supplier’s bank, or a solicitor on a completion, wants the money now, standard spot will not deliver in time. You can usually buy on a same-day or T+1 basis, but at a worse rate.
What a forward rate is, and what you commit to
A fixed rate for a future date is a contract, not a rate held in reserve.
A forward is a binding over-the-counter agreement to exchange a set amount at a fixed rate on a future date. You are not reserving a rate you can walk away from. You are entering a contract.
That contract usually needs a deposit, commonly around 5% to 10% of the amount. If the market moves against your position, the provider can call for more cash. The contract stays binding even if the supplier order or the property deal collapses.
Carry this into every choice below
Fixing a rate is a commitment, not a rate held in reserve.
A forward can create obligations before the payment date: an upfront deposit, a possible margin call for more cash, and a contract you still have to settle if the underlying deal falls through.
One safety point on the deposit. It sits with the FX provider, not in a bank account, so it is covered by FCA safeguarding, which segregates client money from the firm.
It is not covered by the FSCS deposit guarantee of £120,000 per person, which applies to banks. Safeguarding is real protection, but different in kind from a bank deposit.
We keep the deposit, margin-call and drawdown detail on the forward guide, so this page stays on the pay-now-versus-fix question. Read those terms before you book: how forward contracts work.
Why a forward looks worse than spot, and why that is not a markup
The gap is arithmetic, not the provider’s charge and not a forecast.
A business sees the forward rate is worse than spot and reaches for one of two explanations. Either the provider is expensive, or the market is being predicted to move against them. Both are usually wrong.
Forward points are the interest-rate gap, not a forecast
The gap between spot and the forward is the forward points, the interest-rate difference between the two currencies. This is covered interest parity. It is arithmetic, not a view on where the rate is going, and not the provider’s charge.
This page owns that reasoning, why a forward differs from spot and why the difference is not a markup, because the pay-now-versus-fix decision turns on it. The contractual mechanics, deposit sizing, margin calls and drawdown, sit on the forward guide.
Shown once as support, the formula is spot times one plus the domestic interest rate, divided by one plus the foreign interest rate, adjusted for the period. The rates below are illustrative teaching numbers, not live quotes.
Worked example
Spot 1.1700, with an illustrative UK rate of 4% and euro rate of 2%. The one-year forward is 1.1700 times 1.02 divided by 1.04, about 1.1475, some 225 points below spot, because sterling is the higher-yielding currency.
That lifts the cost from about £512,800 at spot to about £522,900 fixed. The rates are illustrative teaching figures; covered interest parity is the market convention, not a Currency Expert forecast.
This £10,000 is the certainty cost previewed earlier. It is a different thing from the £10,500 adverse-move risk, even though both trace back to the same 2%.
Premium or discount depends on which currency pays more interest
Which way the points run depends on the interest gap. If your base currency pays more interest, as sterling does here, the forward is worse than spot, a forward discount on your side. If it pays less, the forward is better than spot.
Because the forward sits almost exactly where a 2% fall would land, a salesperson can present the worse forward as protection priced to your downside, or say the market is already falling so this is fair. That is the misreading dressed up.
The forward number is the interest differential. A higher-yielding sterling makes the euro forward look worse whatever anyone forecasts, and it would sit in the same place if the consensus were that sterling will strengthen.
When to pay spot, and when to fix forward
The rule first, then our view on it, grounded in the pounds already on the table.
This is the single-transaction choice on a known exposure. If the question is how much of next year’s exposure to cover, or whether to run a hedging policy, that is a policy question, not this one. For that wider framing, see our currency hedging guide.
Fix when a rate move would erase margin on a deal you have already priced
Fix the rate when the date is known and a move would erase the margin on a deal you have already priced. You have agreed a sterling price with your own customer, and a forward stops the currency taking that margin back.
This is our judgement, not a law. On a fixed-date commitment where a couple of per cent erases the margin, we treat the certainty of a forward as worth more than chasing a better spot, even when fixing costs the £10,000 shown above.
Stay on spot when the money and the need are both here now
Stay on spot when the money and the need are both present now, or when the business can comfortably absorb the move. On an uncertain date, or an exposure you can carry, we are slow to lock a closed forward and would look at flexibility first.
A flexible forward lets you draw down across a window rather than on one fixed date. The mechanics sit on the fixed versus flexible forward guide. A forward remains binding and deposit-backed, as set out above.
If you are receiving currency, the same decision runs in reverse
An exporter expecting €600,000 in six months converts euros into sterling. The risk is sterling strengthening, because the same €600,000 then buys fewer pounds. You protect it by selling euros forward at a fixed rate.
The trade-off is identical: certainty in exchange for giving up any favourable move. One difference is that the forward points can run the other way for a receiver, depending on the pair, which the forward-points section already covers.
Currency Expert is a comparison and introduction service. We do not execute transfers or hold client funds.
Before you accept a forward quote
Two jobs before you sign, and they are separate.
What one forward number hides
A single forward rate contains two different things. One is the forward points, the interest differential, which is not a markup. The other is the provider’s own FX margin, baked into both the spot and the forward quote.
So a worse-looking forward is not automatically an expensive provider, and a better-looking one is not free money. It can simply carry a wider hidden margin.
- 01
Ask for the live mid-market spot, the forward points and the provider’s margin as three separate figures.
- 02
Ask to see that margin in pounds, so the interest-rate effect and the cost of dealing are not mixed together.
- 03
Get a live spot and a forward quote for the same amount and the same date, at the same moment.
- 04
Take that pair from at least two providers, so the quotes are genuinely comparable.
Get two comparable quotes
Quotes only compare if they cover the same amount, the same date and the same moment in the market, because the market moves while you shop. Line them up side by side and the cheaper dealing cost shows itself.
For deposit, margin-call and provider detail, see how forward contracts work.
Common questions
Is the forward rate a prediction of where the currency will go? +
No. It is the interest-rate differential between the two currencies, not a forecast. The full working sits in the forward-points section above.
Why is a forward sometimes worse than spot? +
Because your base currency pays more interest, as sterling does in the illustration above. That gap is the forward points. The forward-points section shows how it is derived.
Is a forward always worse than spot? +
No. Only when your base currency yields more than the one you are buying. If you buy a currency that pays higher interest than sterling, the forward is better than spot, a forward discount on your side. The same arithmetic runs the other way.
Does buying at spot mean I get the currency instantly? +
No. Spot settles T+2, two business days after you deal, and some pairs such as USD/CAD settle T+1. If you need the funds today, you need a same-day or T+1 arrangement, at a worse rate.
Is fixing a rate forward free? +
There is no upfront fee for the rate itself, but a deposit of roughly 5% to 10% is usually required, a margin call is possible, and the contract stays binding even if the underlying deal falls through.
Tell us about the payment or receipt.
Share the currency, the amount, whether you are paying or receiving, and when the money is due. We will show you a live spot and a forward for the same deal from providers that fit, and be straight about the trade-off. There is no cost and no obligation.
For how we compare a provider’s rate and fee against the live mid-market, see how we compare providers.