Updated on March 6, 2023
A forward spread is the difference in the spot price and the forward price of security considered at a given interval in the derivative market. This difference is also known as the forward point.
A spread can be the difference between the spot price and the forward price of the security over a time period of a few months, the difference between the prices of the security in two different locations, etc. This implies that the forward spread is not constant and can differ depending on the time frame considered and the geographic location of the security in consideration along with other factors like demand for the asset in different markets, perception of sellers in different markets, etc.
Forward spreads are used to ascertain the demand for the underlying asset or security in question. If the spread is wide, it indicates that the asset is able to command a higher price at a future date while a narrow gap indicates that the asset is in high demand currently.