The basic currency harvesting approach invests in the highest yielding currencies and goes short the lowest yielding currencies. The overall approach is designed is to exploit the ‘forward bias’ with currencies.
■ Rank currencies by 3m Libor rates from transparent fixing pages to select current high and low yielding currencies for each strategy
■ Invest in 3 month forwards – buy equal amounts of each selected high yielding currency, and sell equal amounts of each selected low yielding currency
■ Spot and forward rates used in the index calculation are mid rates as per reliable and transparent third party fixing pages
■ Re-balance quarterly, investing in 3 month forwards according to the latest 3 month Libor rankings
Roll Window Feature:
■ To prevent front-running in the market there is a mechanism built in to the indices which is designed
to enhance returns
■ A Roll Window is defined as the 5 days in the week of the third Wednesday in each quarter
■ Two out of five possible Roll Dates are selected at random before the Roll Window starts
■ Half of the position is rolled at the 3m forward rate as of the first selected Roll Date. The second half
is rolled at the 3m forward fixing on the second Roll Date
■ These dates are not released to the wider market until the end of the Roll Window period
Forward Bias in the World’s Currency Markets
Currency forwards are derived from non-arbitrage arguments based on nominal interest rates.
Research shows that currency forwards may be a biased predictor of future spot.
In other words statistical analysis demonstrates that high yielding currencies tend to over-compensate investors for depreciation risk.