Mechanic

According to the pure expectations theory, which of the following statements is most accurate? Forward rates:

A) exclusively represent expected future spot rates.

B) are biased estimates of market expectations.

C) always overestimate future spot rates.

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The pure expectations theory, also referred to as the unbiased expectations theory, purports that forward rates are solely a function of expected future spot rates. Under the pure expectations theory, a yield curve that is upward (downward) sloping, means that short-term rates are expected to rise (fall). A flat yield curve implies that the market expects short-term rates to remain constant.