“Trading the forward rate bias involves buying currencies trading at a forward discount, and selling currencies trading at a forward premium. This makes intuitive sense: It is desirable to buy low and sell high.”

Can someone please explain this, why isn’t it the other way round? A numerical example would be even better
Thank you!

FX rate 1 USD = 100 JPY
US rates = 2%
JPY rates = 10%
Fwd rate = 107.8 (100 x 1.1 / 1.02)

JPY at discount
FWd bias = 7.8

Borrow at 2% (USD) and buy JPY invest at 10%.
This trade assumes the fwd rate is not a good pedictor of future spot rates. The fwd rate premium (of US) over estimates the avtual move of the spot rates.

For example if we can close out trade at 105

We have 100 x 1.1 / 105 = \$1.047
Pay off 100 x 1.02 loan
Gain \$0.027

The carry trade involves going long the currency at a fowrard discount (JPY) and short the one at a premium (USD)

When you say USD at premium, is it because the forward rate is higher and USD being in base means USD appreciates?

Please correct me if I’m wrong,
We are investing in JPY (going long), and JPY is at discount, hence the statement “buying currency trading at forward discount.”
We pay in USD to get JPY, hence we are “short the currency trading at premium.”

When you say USD at premium, is it because the forward rate is higher and USD being in base means USD appreciates?

``````  *It won't mean it will apreeciate. IN the forward market USD is strng - gets more yen
You need to review level 1 currency forwards*
``````

Please correct me if I’m wrong,
We are investing in JPY (going long), and JPY is at discount, hence the statement “buying currency trading at forward discount.”
We pay in USD to get JPY, hence we are “short the currency trading at premium.”

``````*yes*
``````

Thanks a lot for the explanation!