According to the unbiased forward exchange rate hypothesis, the forward exchange rate is an unbiased predictor of the spot exchange rate observed one period lat er. Similar to say, the forward exchange rate reflects available information abo ut the exchange rate hypothesis. Much empirical research has been done to test t he hypothesis; however, no consensus has been reached. This project will test th e unbiased forward exchange rate hypothesis by using monthly data for some major currencies. After a general introduction, Chapter II explains the hypothesis and provides ba ckground information about the spot and forward exchange rates and the differenc e between them. Chapter III reviews previous research done about this hypothesis and summarizes them. Chapter IV tests the hypothesis using OLS regression metho ds on the Canadian Dollar, UK pound sterling, Japanese Yen and others. Chapter V concludes the project by explaining the results and relating them to previous s tudies.

This paper develops a model for the forward and spot exchange rate which allows for the presence of a Markov switching risk premium in the forward market and considers the issue of testing the unbiased forward exchange rate (UFER) hypothesis. Using US/UK data, it is shown that the UFER hypothesis cannot be rejected, provided that instrumental variables are used to account for within-regime correlation between explanatory variables and disturbances in the Markov switching model on which the test is based.

In this paper a familiar, but unsettling result in the foreign exchange literature is reexamined: that the forward rate is not an unbiased predictor of the future spot rate. The paper outlines why some frequently used tests of unbiasedness are noninformative in the sense that they are incapable of correctly testing the hypothesis. Specifically, many of these tests are based on regressions that suffer from simultaneity bias, resulting in biased and inconsistent estimators. This is true whether the tests are conducted using stationary or nonstationary data. This point is demonstrated both analytically and with simulations. Tests of cointegration, which are not subject to the critique presented in the paper, generally fail to reject unbiasedness.

After November 1998, the adjustable peg of the Lebanese pound to the US dollar played a major role in maintaining financial and price stability in the country. It also helped in the expansion of the economy and in the massive capital inflows to the Lebanese market. Moreover, the high stock of assets in foreign currencies prevented Lebanon from any crisis that may hit the economy. The thesis tests for the unbiased forward rate hypothesis as an optimal predictor of the future spot rate. It also supports the fact that the Lebanese pound became a perfect substitute to foreign currencies during the peg period. The study is conducted for the period January 31, 1991 to October 31. The study is divided into two sub-periods. The first sub-period is prior to December 1998, which is renowned as the dirty float period, whereas the second sub period is after December 1998, which is referred to as the adjustable peg period. The empirical results show that the unbiasedness forward rate hypothesis ...