t;t+T], number of units of currency j per unit currency i, denote the indirect quotes of spot exchange rate
and 365T-day forward exchange rate at time t, respectively.
Equation (4) implies directly that the forward exchange rate is equal to the market expectations of the future spot exchange rate
The above tables give, for all parities, the results of modelling of the change of spot exchange rate
as a function of changes in the forward exchange rate as well as the level of disequilibrium in the cointegrating relationship.
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
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.
The evidence indicates that the greater the intensity of country risk events, the greater the conditional variance of spot exchange rates
, and the greater the associated foreign exchange market bid-ask spread.
Spot exchange rates
and all futures rates should increase.
Since over long periods the forward exchange rates tend to be more or less approximate estimates of the values of the spot exchange rates
on the dates the forward exchange contracts mature, the cost of hedging tends to approximate zero.
Copeland (1991) tests five daily spot exchange rates
for consistency with the EMH.
But if trade in goods and services is unresponsive in the short run to movements in spot exchange rates
, the supply of domestic-currency assets in the foreign exchange market does not increase, and the prices of domestic currency in terms of foreign currencies (exchange rates) must rise to reestablish equilibrium in the foreign exchange market.
He also covers the theoretical relationships among expected future spot exchange rates
, forward exchange rates, and efficient markets, while leaving the empirical observations to Part III.