We show it is theoretically possible for the forward exchange rates
to be unbiased estimators of future corresponding spot rates for forward market buyers of currency i but not for both sellers and buyers.
IRP, coupled with PPP and the expectations theory of forward exchange rates
, implies the international Fisher effect (Emery & Finnerty, 2007).
where [E.sub.t] ([s.sub.t+k]|[[OMEGA].sub.t]) = logarithm of expected spot exchange rate at time t + k, based on information known at time t, [s.sub.t+k] = logarithm of spot exchange rate at time t, [f.sup.(k).sub.t] = logarithm of the k-period forward exchange rate
Given that both the spot and forward exchange rates
are non-stationary variables, a randomly chosen linear combination of these variables, e.g., their difference or realised forecast error, [u.sub.t+1] = [s.sub.t+1] - [f.sub.t], will probably also be non-stationary.
Assuming that the interest rate parity holds, the forward exchange rate
will be 97.28 yen/dollar.
The Phillips-Perron [Z.sub.p]-statistics indicated that both logs of the spot and forward exchange rates
were unstable but that the expected rate of appreciation and the risk premium were stable series with an AR(1) process for all countries.
The modern approach to forward exchange rate
determination suggests that the equilibrium forward exchange rate
is determined by the actions of two groups, arbitrageurs and speculators.
In the presence of microstructure frictions, spot and forward exchange rates
move against traders as they increase their positions.
Forward exchange rates
often reveal the market's best guess about a currency's future path, but no forward renminbi market exists because China restricts such trading.
This is, however, a good description of covered interest parity since forward exchange rates
are generally determined by interest rate differentials so profits are arbitraged away.
The overvaluation of sterling is therefore not as acute as it was, and the fall has been [TABULAR DATA OMITTED] considerably sharper than the decline predicted by forward exchange rates
. Nevertheless today's exchange rate, of euro 1.42 to the pound, is too high for membership of the currency union.
forward exchange rates
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