Fixed Income - Relationship between future spot and forward rates
Thus, if a trader expects that the future spot rate will be lower than what is predicted by the prevailing forward rate, the forward contract value is expected to increase. To capitalize on this expectation, the trader would buy the forward contract. Conversely, if the trader expects the future spot rate to be higher than what is predicted by the existing forward rate, then the forward contract value is expected to decrease. In this case, the trader would sell the forward contract.
Why would future spot rates that are lower than current forward rates mean that a bond is undervalued, and vice versa?
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