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Prediction of future currency exchange rates from current currency futures prices: The case of GM and JY

Prediction of future currency exchange rates from current currency futures prices: The case of GM... INTRODUCTION The collapse of the fixed exchange rate system in 1973 led to volatile currency exchange rates that are influenced by large financial transactions, higher mobility of capital, volatile interest rates, and speculation. This increase in volatility has created the need to find new instruments to manage risk through hedging and forecasting foreign exchange rates. Among the instruments available, currency futures have been used to reduce the downside risk of adverse movements of exchange rates. They can be used also to provide estimates of future short term spot exchange rates as described below. The most widely used models in pricing futures are the expectations hypothesis and the cost-of-carry model. The former implies that current futures contract prices summarize all relevant and available information concerning the future value of the spot exchange rate. In other words, the current price of a futures contract is equal to the market expectations w George M . Jabbour is an Associate Professor in the Department o Finance at f George Washington University. The Journal of Futures Markets, Vol. 14, No. 1, 25-36 (1994) 0 1994 by John Wiley & Sons, InC. CCC 0270-73141941010025-12 Jabbour of the spot price on the delivery date. If http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Futures Markets Wiley

Prediction of future currency exchange rates from current currency futures prices: The case of GM and JY

The Journal of Futures Markets , Volume 14 (1) – Feb 1, 1994

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References (4)

Publisher
Wiley
Copyright
Copyright © 1994 Wiley Periodicals, Inc., A Wiley Company
ISSN
0270-7314
eISSN
1096-9934
DOI
10.1002/fut.3990140104
Publisher site
See Article on Publisher Site

Abstract

INTRODUCTION The collapse of the fixed exchange rate system in 1973 led to volatile currency exchange rates that are influenced by large financial transactions, higher mobility of capital, volatile interest rates, and speculation. This increase in volatility has created the need to find new instruments to manage risk through hedging and forecasting foreign exchange rates. Among the instruments available, currency futures have been used to reduce the downside risk of adverse movements of exchange rates. They can be used also to provide estimates of future short term spot exchange rates as described below. The most widely used models in pricing futures are the expectations hypothesis and the cost-of-carry model. The former implies that current futures contract prices summarize all relevant and available information concerning the future value of the spot exchange rate. In other words, the current price of a futures contract is equal to the market expectations w George M . Jabbour is an Associate Professor in the Department o Finance at f George Washington University. The Journal of Futures Markets, Vol. 14, No. 1, 25-36 (1994) 0 1994 by John Wiley & Sons, InC. CCC 0270-73141941010025-12 Jabbour of the spot price on the delivery date. If

Journal

The Journal of Futures MarketsWiley

Published: Feb 1, 1994

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