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The empirical tendency of forward exchange rates to over-estimate changes in spot exchange rates. According to the theory of uncovered interest arbitrage, forward exchange rates are unbiased predictors of future spot exchange rates, implying that a forward contract's expected return equals 0 percent. It is an empirical fact, however, that during the modern floating rate era, the forward exchange rates of the major currencies have predicted larger subsequent changes in the spot rates than have occurred. Forward contracts that have sold at discounts have produced positive returns on average, while forward contracts that have sold at premiums have produced negative returns on average. See also Uncovered Interest Arbitrage, Prediction Bias.
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