“Is the forward exchange rate the most essential forecaster ofthe future spot exchange rate?” USD vis-à-vis SEK & NZD2004 - 2005

Abstract: This paper will examine the empirical power of the forward exchange rate as theultimate predictor of future spot exchange rate. The paper intend to illustrate thisprocess of focusting future spot rate using three exchange rate models the 1. Unbiasedforward rate estimator, 2. Random walk and 3. Weighted average. The paper willanalyse the period between January 2004 and January 2005 for the United States dollarvis-à-vis Swedish kronor and New Zealand dollar using daily, three months, Sixmonths and twelve months intervals. The paper will also consider three months as theshort run period and the period of six months - twelve months as the long run periodfor the whole period under examination. The aim of this paper is to study the predictingpower of the three empirical exchange rate models using United States dollar vis-à-visSwedish kronor and the New Zealand dollar and compare their performance. Sincethere is no general agreement as to which model is the best estimator of future spotexhange rates. The paper will analyse which model is better predictor of future spotexchange rate over the different time periods of three months, six months and twelvemonths in two markets.