And those facing a foreign exchange crunch reposition themselves, knowing that both ready and forward exchange rates
would be affected once this happens.
(9) We further empirically examine the informational content of forward exchange rates
and discuss the role of liquidity in the predictive power of the forward exchange rates
Our sample dataset consists of bid and ask quotes for both spot and forward exchange rates
of three currencies: Australian dollar, British pound, and US dollar.
The expectations theory of forward exchange rates
maintains that the expected spot exchange rate t periods in the future equal the t-period forward rate, so the PPP must hold for every period of t in equilibrium:
The third interim dividend will be payable on 11 December 2013 in cash in USD, GBP or HKD, or a combination of these currencies, at the forward exchange rates
quoted by HSBC Bank plc in London at or about 11.00am on 2 December 2013, or as a scrip dividend.
The analysis is based on quarterly data of spot and 3-month forward exchange rates
plus 3-month USD Libor and 3-month EUR Libor interbank interest rates.
Therefore, the existence of a cointegrating relationship between spot and forward exchange rates
casts doubt on the validity of the 'traditional' tests described above (a).
In the short term, accurate interest rate forecasting can help determine potential changes in the forward exchange rates
. In more efficient markets, such as the Eurocurrency markets, forward exchange rates
are based on both current and future expectations of the interest rate differential.
This is because forward exchange rates
(like bonds) have a built in market illiquidity premium, which would vary with country and time period.
This was despite an increase in UK sterling and Euro SWAP rates, the difference between the forward exchange rates
and the spot rates.