Expectations theory of forward exchange rates

Expectations theory of forward exchange rates

A theory of foreign exchange rates that states that the expected future spot foreign exchange rate t periods from now equals the current t-period forward exchange rate.

Pure Expectations Theory

In foreign exchange, a theory that forward exchange rates for delivery at some future date are equal to the spot rates for that date. The theory only functions in the absence of a risk premium. Critics contend that the evidence shows that pure expectations do not occur in actual trading.
References in periodicals archive ?
The expectations theory of forward exchange rates maintains that the expected spot exchange rate t periods in the future equal the t-period forward rate, so the PPP must hold for every period of t in equilibrium: