Efficiency in the Forward Markets for Foreign Exchange
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.
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