Empirical studies find a forward exchange rate bias, which means that future spot rates are different from those predicted by current forward rates. For example, if country B has a higher nominal interest rate stmcture than country A, this implies higher expected future inflation in country B than in A so that the forward exchange rate of country A should be at a premium over the current spot rate. The expected future spot rate should also be higher than the current spot rate by the same percent as the forward premium. Over a large number of empirical studies, often the actual future spot rate is lower than the current spot rate.
(a) What are some possible explanations for the forward rate bias?
(b) How do forecasters seek to profit from the bias?