The Prediction of the USD/EUR Spot Exchange Rate on the Basis of the Forward Exchange Rates
The Prediction of the USD/EUR Spot Exchange Rate on the Basis of the Forward Exchange Rates

Summary/Abstract: The aim of the paper is to assess the extent to which the future spot exchange rates can be predicted on the basis of the present forward exchange rates. The analysis refers to the prediction of the spot exchange rate USD/EUR on the basis of the forward exchange rates over the period from 2005 to 2013. Both graphical and regression analyses are used to examine the relationship between daily closing spot and forward rates, specifically 3-month rates and 6-month rates. The regression equation is estimated by the ordinary least squares method, and the hypotheses related to the parameters are tested at the 5% significance level. The author examines whether the time series is stationary. Subsequently, the time series is detrended in order to guarantee stationarity. The transformation into non-linear econometric model is used in order to eliminate high positive autocorrelation in the residuals of the model. Then the predictions of the detrended model are made. The results of the analysis show that the present forward exchange rates are not sufficiently reliable predictors of the future spot exchange rates. These findings are important for financial analysts working in financial companies or enterprises participating in international turnovers, as well as for speculators acting in the foreign exchange markets.

• Details
• Contents