We first develop the theoretical rationale of the forward exchange rate
unbiasedness hypothesis (FUH) for buyers of forward exchange under an assumption of risk neutrality and interest rate parity.
Wallace (1999), "Non-Informative Tests of the Unbiased Forward Exchange Rate
," Journal of Financial and Quantitative Analysis 34(2): 265-291.
The report forecasts that the forward exchange rate
for Q3 2016 will reach EGP 10.
The market expected a 12-month forward exchange rate
As a response, ICBC has rolled out foreign exchange hedging products and helped enterprises avoid risks of exchange rate and interest rate by adopting financial instruments such as forward exchange rate
and forward interest rate, swap, option and hybrid instruments.
Therefore, the forward exchange rate
can be expressed as:
Finally, assume that the 90-day forward exchange rate
According to the theory, the currency with higher (lower) short-term interest rate will exhibit a discount (premium) in its forward exchange rate
t] = logarithm of the k-period forward exchange rate
If the forward exchange rate
is an unbiased predictor of the future spot rate, exchange risk will have no effect on the expected profits of a hedged firm.
Additionally, Glyndwer wanted to mitigate project exchange risks - and the risks of cost overruns - so entered into a range of forward exchange rate
contracts with RBS CIB.
When engaging in such transactions, each entity will determine an acceptable price based on the forward exchange rate
that coincides with the payment date.