Normal 0 false false false MicrosoftInternetExplorer4

<!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman";} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.25in 1.0in 1.25in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} -->

/* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;}

Ghaith Ady TTH 1-2:15 Forward and Spot Exchange Rates In the early 1970’s, the Bretton Woods system of fixed parities collapsed and the forward exchange rate has assumed a primary role in hedging against fluctuations in future spot exchange rates. The efficacy of hedging currency risk, on the other hand, depends in part on the relation between spot and forward exchange rates. If, for example, the forward rate is used to predict future spot exchange rates, then unsteadiness in the spot-forward exchange rate relation produces bigger forecast errors.It has been debated that in international monetary economics, is whether the forward exchange rate contains helpful information about the future path of the spot exchange rate. If the predictable change in the exchange rate equals the interest differential between the currencies, and the difference between the spot and forward exchange rates “the forward premium” equals the interest rate differential, the equilibrium forward exchange rate recognized now in an efficient market for delivery of foreign exchange in x periods ahead, it should be the best available predictor of the spot exchange rate realized x periods later. Studies have shown, however, that the forward rate is not the best predictor of the future spot rate; indeed it tends to miss-predict the direction of succeeding spot rate changes. Some authors attribute this rejection of the “simple efficiency hypothesis” to a risk premium and others to inefficient information processing by market participants, but studies using survey data on expected exchange rate changes indicate that the risk premium cannot fully explain this phenomenon. Many economists therefore dismiss the forward rate as containing little information in relation to successive spot rate movements.

Normal 0 false false false MicrosoftInternetExplorer4

<!-- /* Font Definitions */ @font-face {font-family:Garamond; panose-1:2 2 4 4 3 3 1 1 8 3; mso-font-charset:0; mso-generic-font-family:roman; mso-font-pitch:variable; mso-font-signature:647 0 0 0 159 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman";} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.25in 1.0in 1.25in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} -->

/* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;}

  The Term Structure of Forward Exchange Premia and The Forecastability of Spot Exchange Rates: Correcting the Errors

THE SPOT-FORWARD EXCHANGE RATE RELATION AND INTERNATIONAL MARKET CONDITIONS by Matt McPherson and John Vilasuso Multinational Financial Management By Shapiro and Sarin