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Efficiency in the Forward Markets for Foreign Exchange


  • Urwin, Richard


An efficient financial market is one which is efficient in processing information, so that current prices incorporate all relevant data, correctly evaluated. It has two features which ought to be emphasised. Firstly, as prices are presumed to move immediately to a new equilibrium when 'shocked', they represent the harmonious outcome of utility and profit maximising behaviour. The signals by these prices will ensure that any consequent resource allocation is an efficient one. Secondly, since the return on a financial asset consists of a yield and capital gain or loss, expectations of the future play an important role in determing the current price. Asset markets are inherently speculative, but the efficient markets hypothesis suggests that all opportunities for investors to earn unusual profit by exploiting available information will be eliminated. The price of a security at time will reflect all relevant knowledge about the future which will affect its expected return, which results in the anticipated return to speculative activity being zero.

Suggested Citation

  • Urwin, Richard, 1983. "Efficiency in the Forward Markets for Foreign Exchange," The Warwick Economics Research Paper Series (TWERPS) 246, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:246

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    References listed on IDEAS

    1. Wilson, Charles A, 1979. "Anticipated Shocks and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 639-647, June.
    2. Brock, William A., 1975. "A simple perfect foresight monetary model," Journal of Monetary Economics, Elsevier, vol. 1(2), pages 133-150, April.
    3. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
    4. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
    5. Dornbusch, Rudiger & Fischer, Stanley, 1980. "Exchange Rates and the Current Account," American Economic Review, American Economic Association, vol. 70(5), pages 960-971, December.
    6. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    7. Flood, Robert P & Garber, Peter M, 1980. "Market Fundamentals versus Price-Level Bubbles: The First Tests," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 745-770, August.
    8. Olivier Jean Blanchard, 1980. "The Monetary Mechanism in the Light of Rational Expectations," NBER Chapters,in: Rational Expectations and Economic Policy, pages 75-116 National Bureau of Economic Research, Inc.
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