How do you know if Forward Rate Parity holds (i.e. forward rate is an unbiased predictor of future spot rate)? What does it mean “to hold”? If this hold, then Uncovered IRP holds, but I’m just having a bit of trouble grasping what this truly means. Honestly, I’m not even sure if I’m this question correctly. Thanks!
If the forward rate curve is an unbiased predictor of the future spot rate, then the future spot curve will evolve as indicated by the current forward rate curve. It’s very much an ex-post assessment i.e. there is no certainty today that parity will hold. To my understanding it’s this degree of uncertainty that allows for rolling down the yield curve - the strategy relies on an investor believing that the future spot curve will not evolve in the manner indicated by the current forward rate curve.