The forward rate as an unbiased predictor of the future spot rate / Zulkiffli Othman

The foreign exchange market makes possible payments from one country to another. Because of its importance, it is not surprising to find numerous studies which examined the ability to predict future spot rates. Under unbiased forward rate hypothesis (UFH), the forward rate in foreign exchange markets is considered an unbiased predictor of the fiiture spot rate. Studies by Edwards(1982, 1983), Kohlhagen(1975), Longworth(1981), and Cornell(1977) have supported the unbiased future rate hypothesis. A simple linear regression is used to examine the relationship between forward exchange rate and the future spot rate. The hypothesis testing involved and observation of 30-days, 90-days, and 120-days forward exchange rate from four countries namely Germany, Hong Kong, Malaysia and Singapore. Results of the study periods demonstrate that null hypothesis of the unbiasedness of the forward rate is rejected for some nations but is retained for others. The notions of the study reveals that forward rate for Singapore currency is highly significant and potray the trend of the future spot rate.