Journal of Management Research
Volume 2, Number 2 (April- June 2002)
ISSN: 0972-5814 Online ISSN: 0974-455X
Forward Foreign Exchange Rates as an Unbiased Predictor of Future Spot Rates
Madhu Vij
| Abstract |
This paper reexamines a familiar relationship in literature: that the forward rate is an unbiased predictor of the future spot rate at one, three and six month intervals. We find that the forward rates have little power in predicting the future spot rate as some crucial information that is available with economic agents is only known at later dates and news that is only partially known at the time of the forecast becomes known only at the date of maturity. Also, a longer horizon forward rate, such as the 1-year forward exchange contract has more information about the spot exchange rate than the shorter horizon of 30 days or even 3 months.
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