Forward exchange rate contracts are used, among other things, to eliminate future spot exchange rate
The focus of these approaches was mainly on whether (a) a spot exchange rate
for a currency behaves as a random walk or whether the foreign exchange market is weak-form efficient (b) the forward rate for a currency is an unbiased predictor of the future spot exchange rate
for that currency or whether the foreign exchange market is semi-strong form efficient and (c) there are cointegrating relationships among several currencies or whether the foreign exchange market is semi-strong form efficient.
Table 1 Yen Spot Exchange Rate
Before crisis after crisis Mean 107.8485 [yen]/$ 89.2825 [yen]/$ S.D.
(11.) The forward premium is the percentage difference between the forward rate and the spot exchange rate
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,
(3) The series of the expected exchange rate (E[S.sub.t+1]) was obtained by forecasting the time series of the spot exchange rate
under the uncovered interest parity.
Then we generate the daily real exchange rate series by multiplying the daily spot exchange rate
series with the exporting country to domestic country price ratio.
Because the forward price is linked to the spot price through covered interest parity, intervention in the forward market can influence the spot exchange rate
and Mark Taylor (1996), `The Term Structure of Forward Exchange Premia and the Forecastability of Spot Exchange Rates
: Correcting the Errors', Liverpool Research Paper No.
That notion was extended to hedges of foreign-currency instruments remeasured at current spot exchange rates
with the resulting gain or loss reported in earnings.
Since the country risk indexes are only updated monthly, we construct monthly averages of the daily percentage bid-ask spreads along with the monthly standard deviations of the daily percentage changes of the spot exchange rates
for all 36 currencies.
Copeland (1991) tests five daily spot exchange rates
for consistency with the EMH.