Discussing Foreign, Forward and Future Exchange Rates
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Discuss: Some forecasters believe that foreign exchange markets for the major floating currencies are 'efficient' and forward exchange rates are unbiased predictors of future spot exchange rates. What is meant by 'unbiased predictor' in terms of how the forward rate performs in estimating future spot exchange rates?
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Solution Summary
The solution discusses foreign, forward and future exchange rates.
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Intuitively this means that the distribution of possible actual spot rates in the future is centered on the forward rate. The fact that it is an unbiased predictor, however, does not mean that the future spot rate will actually be equal to what the forward rate predicts. Unbiased prediction simply means that the forward rate will, ...
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