Abstract
This paper examines the forward discount anomaly, i.e. the fact that the forward exchange rate is a biased predictor of the future spot rate. We run a series of rolling regressions which we use to predict the value of the future spot rate based upon this bias. We show that the average return from an investment strategy based on the bias in forward exchange rates is in many cases insignificantly different from zero. In other cases, however, the return is significantly positive. Hence the in-sample bias does not necessarily lead to a money-making strategy for all currencies.
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