Foreign Exchange Rates as Unbiased Estimate of Future Sport Rates Dissertation

Foreign Exchange Rates as Unbiased Estimate of Future Sport Rates - Dissertation Example This knowledge will enable the formulation of trading strategies to enhance the effectiveness of market entry and exit, to properly time the purchase of currencies at the lows, and the sale at the highs, or to adopt an adequate hedging position. The study employed three methods of determining the existence of EMH with the intention of arriving at results that corroborate each other, since any one method taken alone can never be assuredly accurate. The first method employs the regression of future spot rates against forward exchange premiums. The second method tests for a confirmation of the unbiased forward rate hypothesis which is indicated by the co-integration of the forward exchange rate and the future spot rate. The third method employs an analysis of EMH on real terms also through regression modeling and equation estimation. Each of the three methods provided evidence that the efficient market hypothesis is valid in the currencies exchange market, specifically in the Swiss fran c – US dollar spot and forward exchange rates. The weak form of market efficiency has been tested and validated, for which reason investors and business would most likely not realize abnormal profits through the use of methods of technical analysis for price forecasting. Table of Contents Abstract 2 Table of Contents 3 Introduction 5 Background of the problem 5 Statement of the issue 6 Structure of the work 7 Literature Review 8 EMH and the Foreign Currencies Market 8 EMH in the forex market before and after the 2008 global financial crisis 9 The relationship of forward and spot rates in the forex market 10 Further studies on the predictability of foreign exchange rate behavior 12 Theoretical Framework 14 The Efficient Market Hypothesis 14 Weak form EMH. 15 Semi-strong form EMH 16 Strong form EMH 18 Evidence for and against EMH 19 Empirical Framework 21 Results 23 First Test: Result of regression estimation 23 Second Test: Determining co-integration between st+1 and ft 27 Thi rd Test: Real terms 30 Conclusion 33 Summary of the dissertation 33 Conclusion 34 Other studies could explore the semi-strong and strong forms of efficiency in the currencies exchange market. Responses of prices to news announcements affecting fundamental value or confidence about the underlying economy may prove useful to determining the rate of adjustment of a partially semi-strong efficient market to newly available information. It shall also be a challenge to conduct a study on the strong form market efficiency, because of the difficulty of obtaining data on essentially illegal activities. 36 Bibliography 37 Introduction Background of the problem In the early sixties and prior, the exchange rates in international currencies were governed by the fixed exchange rate regime. From 1973, however, the general free floating exchange rate regime was adopted by the major European central banks, with other international monetary systems adopting the same policy. As a result, companies wit h international exposure (there were very few â€Å"multinationals† then) were particularly prone to shifts in exchange rates of the currencies in which it dealt with (Soenen, 1979). Companies with international operations would at any one time be purchasing raw materials in countries where they are cheap, with their local currency, and selling the finished products in other countries where the demand is great, also with their local