A Comparative Analysis of Forward and Futures Exchange Rates as Unbiased Predictors of Future Spot Rates

While numerous articles report empirical evidence on the relationships between forward and spot foreign currency exchange markets, little work exists on the value of the future currency exchange market as a source of information on future spot rates. Both forward and futures markets are used to reduce risk in foreign currency holdings; however, structural differences between the future and forward currency markets may result in their differing in forecasting performance. This paper compares the institutional and structural differences between both markets. In addition, the effectiveness of both markets in forecasting future spot rates is analyzed for four currencies. Results indicate that with some minor exceptions rates in the foreign currency futures and forward markets are on average unbiased forecasts of the future spot rates and exhibit lower degrees of forecast efficiency the longer the forecast horizon