The "'forward exchange rate "'( also referred to as "'forward rate "'or "'forward price "') is the exchange rate at which a Financial economists have put forth a hypothesis that the forward rate accurately predicts the future spot rate, for which empirical evidence is mixed.
32.
Under this condition, a domestic investor would earn equal returns from investing in domestic assets or converting currency at the spot exchange rate, investing in foreign currency assets in a country with a different interest rate, and exchanging the foreign currency for domestic currency at the negotiated forward exchange rate.
33.
Eugene Fama concluded that large positive correlations of the difference between the forward exchange rate and the current spot exchange rate signal variations over time in the premium component of the forward-spot differential F _ t-S _ t or in the forecast of the expected change in the spot exchange rate.
34.
If there were no impediments, such as transaction costs, to covered interest arbitrage, then any opportunity, however minuscule, to profit from it would immediately be exploited by many financial market participants, and the resulting pressure on domestic and forward interest rates and the forward exchange rate premium would cause one or more of these to change virtually instantaneously to eliminate the opportunity.
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