Interpolating FX Forward Points Between Quoted Maturities

Summary

The document addresses how FX traders estimate forward prices for maturities that are not directly quoted. It reports that linear interpolation of forward points is common practice. The rationale is that forward points are a difference from spot and can be negative, making direct log-linear interpolation of those points inappropriate. Interpolating outright forwards, which combine spot and points, may be more principled in some settings, but the answers suggest the practical benefit is limited.

When the relative shapes of the two currencies’ yield curves are known, those curves can help distinguish more expensive from less expensive value dates and inform pricing. Without that information, linear interpolation is a conventional approximation. Another suggested approach is to infer a rate or spread from deposit rates and interpolate it, though the response offers no detailed comparison or evidence that it materially improves results. The discussion is practical guidance rather than a quantitative study, and it notes that wider bid–ask spreads at longer maturities can limit opportunities to trade on small interpolation differences.

Key ideas

• Linear interpolation of FX forward points is described as common market practice.
• Forward points are spot-relative differences and may be negative, so log-linear interpolation of the points is unsuitable.
• Yield-curve shapes can help account for relative pricing across dates when that information is available.
• Interpolating an implied deposit rate or spread is an alternative, but the document gives no detailed performance comparison.
• Wide bid–ask spreads at longer maturities can make small interpolation refinements less actionable.

Tags

# Interpolating FX forward points


# Interpolating FX forward points












When computing an FX forward rate for an expiry that is not explicitly quoted, it seems to me that a reasonable way to do it is log-linear interpolation of the two nearest outright forward rates, which would correspond to assuming continuous compounding at a constant rate in both currencies. However, it seems that it is common to calculate this rate by linear interpolation (e.g., see this tutorial, page 12).

What is most commonly done in practice by FX traders?

## Answer by Phil H (score 9, accepted)

https://quant.stackexchange.com/a/4082

Most common practise is to linearly interpolate. Log-linear would be wrong; forward points are commonly negative, and are merely a delta on the Spot. Closer would be log-linear on the outrights (Spot plus forward points), but even that is not worth bothering with.

If you have some idea of the shapes of the underlying yield curves, you can work out which are the more and less expensive days in the run and price accordingly.

If you don't know the relative yield curve shape, then there's no point in doing anything but linear interp since you're already approximating, and the convention is linear. I believe the phrase is 'you can't polish a ...'

The interesting question is really 'which underlying yield curves?'

## Answer by BlueTrin (score 1)

https://quant.stackexchange.com/a/4088

As Phil H mentioned, linearly interpolate them is what many traders will do.

Alternatively, if you look at deposit rates, you can try to imply either a spread on one leg or a rate on one leg and interpolate this rate. I did not do this since quite a long time but you should find that the results are not too different.

If I remember correctly usually the bid ask is fairly large for longer maturities, so you have not much chances to cross someone.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.