Is the forward exchange rate a useful indicator of the future spot exchange rate

In the past two decades, there have been many empirical studies both in support of and opposing the unbiased forward rate hypothesis (UFH). The UFH argues that the forward rate “fully reflects ” available information about the exchange rate expectations (Chiang 1988). One view of market efficiency states that the current prices reflect all available information. When this is applied to the foreign exchange market, it implies that 'economic agents ’ expectations about future values of exchange rate determinants are fully reflected in the forward rates (Chiang 1988). ” To test this hypothesis, the conventional method uses an OLS regression, with the spot rate as the dependent variable, while the one-period lagged forward rate as the independent variable. To support the UFH, the constant term would not differ from zero, the coefficient of the one-period lagged forward rate would not significantly differ from one, and the error term would not exhibit any serial correlation. The purpose of this paper is to test the validity of the UFH. The first section of this paper provides background information about forward exchange rates and reviews previous studies that have been conducted on the validity of the UFH. Section II reports the results from the regression analysis, while Section III presents the results from th