Question: Empirical studies find a forward exchange rate bias, which means that future spot rates are different from those predicted by current forward rates. For example,

Empirical studies find a forward bias, which means that future spot rates are different from those predicted by current forward rates. For example, if country B has a higher nominal interest rate stmcture than country A, this implies higher expected future inflation in country B than in A so that the forward of country A should be at a premium over the current spot rate. The expected future spot rate should also be higher than the current spot rate by the same percent as the forward premium. Over a large number of empirical studies, often the actual future spot rate is lower than the current spot rate.
(a) What are some possible explanations for the forward rate bias?
(b) How do forecasters seek to profit from the bias?

Step by Step Solution

★★★★★

3.53 Rating (163 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

a Two possible explanations for the bias are common in the literature One is that 1 is evidence of a risk premium on foreign exchange If investors are ... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

897-B-C-F-G-F (3311).docx

120 KBs Word File

Students Have Also Explored These Related Corporate Finance Questions!

Golden Eagle Company has the following balances at the end of November: The following information is known for the month of December: 1. Purchases of supplies for cash during December were $2.500....

On October 1, 2013, Biddle Corporation purchases equipment from a supplier in France on account at a purchase price of ¬40,000 and denominates the transaction in euros. Biddle Corporation must...

On July 1, 2013, Owens Corporation places an order with a European supplier for manufacturing equipment for delivery on June 30, 2014. The purchase is denominated in euros in the amount of...

Part I Maple Company had the following export and import transactions during 20X5: 1. On March 1, Maple sold goods to a Canadian company for C$30,000, receivable on May 30. The spot rates for marks...

I am working on a group project for my International Finance class. The object is to predict future spot rates using different methods (RPPP, IFE, FUPFS). My part of the project is to determine "real...

Week 4 Homework Assignment This assignment is due by 6 p.m. eastern time on Sunday, September 17.When you turn it in, please: (1) Include your team number and assignment number in the filename(s)....

Problem 1 Open the Excel file called "interest rates from 1982 to 2017" which contains annualized yields on zero-coupon bond of various maturities (3 and 6 months, 1, 2, 3, 5, and 10 years) over the...

Exam 4 Q1. Ribbon Industries reported sales of $3 million and net income of $400,000 for 2010. The retained earnings balance at the end of 2012 is $7 million. Ribbon Industries has a dividend payout...

Q1. Ribbon Industries reported sales of $3 million and net income of $400,000 for 2010. The retained earnings balance at the end of 2012 is $7 million. Ribbon Industries has a dividend payout ratio...

Recently a surgical group of physicians in Savannah posted a website that includes a page that refreshes every 10 minutes and shows how close the doctors are following their scheduled appointment...

Wilmington Composites, Inc., developed its overhead application rate from the annual budget. The budget is based on an expected total output of 720,000 units requiring 3,600,000 machine hours. The...

For tax purposes, the designation of a well as exploratory or development has great significance.

Using the table below, place an X in the column that corresponds to the type of activity level referred to in eachscenario. UNIT BATCH PRODUCT CUSTOMER ORGANIZATIONAL a. Setting up a machine for a...

The following accounts and transactions are for Randy Guttery, Landscape Consultant. INSTRUCTIONS Analyze the transactions. Record each in the appropriate T accounts. Use plus and minus signs in...

The Coca-Cola Company reported that the mean per capita annual sales of its beverages in the United States was 423 eight-ounce servings (Coca-Cola Company website, February 3, 2009). Suppose you are...

The following errors occurred in posting from a two-column journal: 1. A credit of $6,000 to Accounts Payable was not posted. 2. An entry debiting Accounts Receivable and crediting Fees Earned for...

Last Chance Company offers legal consulting advice to prison inmates. Last Chance prepared the end-of-period spreadsheet that follows at June 30, 2018, the end of the fiscal year. Instructions: 1....

4. For each of the following, determine whether the group is a sample or a population: a. The participants in a study of a new diabetes drug. b. The drivers who received a speeding ticket in Halifax...

You own a cab company and are evaluating two options to replace your fleet. Either you can take out a five-year lease on the replacement cabs for $500 per month per cab, or you can purchase the cabs...

You own a piece of raw land in an up-and-coming area in Gotham City. The costs to construct a building increase disproportionately with the size of the building. A building of q square feet costs 0.1...

Genenco is developing a new drug that will slow the aging process. In order to succeed, two breakthroughs are needed: one to increase the potency of the drug, and the second to eliminate toxic side...

Barnes Entertainment Corporation prepared a master budget for the month of November that was based on sales of 153, 700 board games. The budgeted income statement for the period is as follows. During...

4 5 Prepare a cash budget for Green Corp. using the following assumptions: 6 7 9 Collections related to all sales have been projected to be: 20% collected during the month of sale 60% collected one...

Stockton Mineral Operations ( SMO ) currently has 5 7 0 , 0 0 0 shares of stock outstanding that sell for $ 9 0 per share. Assume no market imperfections or tax effects exist. Determine the share...