Whatever the explanation for the forward rate bias and whatever the reason for its persistence, we hope that the forward rate bias will continue to exist well into the future. Armed with this evidence, how can tradable profits be realized? The easiest way to trade the forward rate bias is to use currency futures. Futures contracts can be easily bought or short-sold, are easy to cancel, and have low trading costs. On the other hand, forward contracts are restrictive and difficult to cancel. The pricing of forward contracts and futures contracts is almost identical, so the trading profits will also be equivalent. The trading strategy consists of buying the currency with the highest interest rate and unwinding the position a month later. A one-month holding period is chosen because the forward rate bias is most prominent for shorter periods. The following steps are taken in choosing and executing the strategy. Read the rest of this entry »