Prediction of Currency Pairs : Statistical relations between futures and forward contracts

Abstract: Forecasting prices is a widely extended topic on the financial markets and is used by traders all over the world to make profitable trades. However, there exists a limited amount of research regarding the relation between the price movements of futures and forward contracts. In this thesis work that relation has been investigated in order to see if it is possible to increase the efficiency of the pricing for two different currency pairs that are traded on the forex exchange market. The aim was to develop a statistical model that could find statistical relations so that an improvement in the pre-dictions was seen. Throughout the project two different models were tested to find this relation, using time series data that included the trade dates, prices and delivery dates for the contracts. The Random Forest algorithm performed best in this study with a prediction that generated low mean squared errors, and high out-of-bag scores. Even though the algorithm performed quite well, none of the results found, provided evidence of a useful statistical relation between futures and forward contracts