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Good articleForward exchange rate has been listed as one of the Social sciences and society good articles under the good article criteria. If you can improve it further, please do so. If it no longer meets these criteria, you can reassess it.
Article milestones
DateProcessResult
October 3, 2012Good article nomineeListed

Annualize

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In response to this edit, which I reverted with a WP:SOFIXIT suggestion, the example is taken straight from a textbook. It uses 360 days because of banks' tendency to use a 360 day year in calculating daily compound interest. The case here is that the d will have whatever value depending on the days to delivery. The example already does that toward the bottom of the Forward premium or discount section. So, actually, I'm not sure what needs fixing? At any rate, please avoid writing text onto the article that says "the following should be modified" and the like; such comment text belongs on the talk page so that we avoid leaving editor notes embedded within the article content. John Shandy` • talk 13:45, 27 March 2012 (UTC)[reply]

GA Review

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This review is transcluded from Talk:Forward exchange rate/GA1. The edit link for this section can be used to add comments to the review.

Reviewer: TonyTheTiger (talk · contribs) 14:32, 10 September 2012 (UTC)[reply]

WP:LEAD
I have added to commit to the sentence; I agree that it helps clarify or emphasize that it is a commitment for the future. John Shandy` • talk 19:11, 11 September 2012 (UTC)[reply]
I have expanded the lead to better summarize the article's sections, and reorganized wikilinks accordingly.John Shandy` • talk 19:26, 18 September 2012 (UTC)[reply]
Intro
I have reorganized the sections, there is now an introduction section, and the lead has been condensed to give a summary of that section's most important parts. The new lead is shorter, but I feel it is of sufficient length without offering too much detail. I reorganized wikilinks accordingly and added new wikilinks along the way. John Shandy` • talk 05:24, 23 September 2012 (UTC)[reply]
Relation to covered interest rate parity
I have removed the redundant no-arbitrage. John Shandy` • talk 19:11, 11 September 2012 (UTC)[reply]
I have moved the wikilink to the first usage in the lead. John Shandy` • talk 19:11, 11 September 2012 (UTC)[reply]
  • "The reason for the no-arbitrage condition is that the dollar return on dollar deposits, 1+i$, is set equal to the dollar return on euro deposits, F/S(1+ic). " is not explicit enough to be helpful to those looking to this article for clarification. A rectangular graphic would be helpful. However, it is important to describe parity as a condition in which a dollar investor will earn the same return by investing in dollar-return investments as he would earn converting to a foreign currency at the spot exchange rate, investing in foreign currency return investments and commiting to exchange the foreign returns at the forward exchange rate. A similar relationship holds for foreign investors with the dollar.--TonyTheTiger (T/C/BIO/WP:CHICAGO/WP:FOUR) 20:17, 11 September 2012 (UTC)[reply]
  • I.e., describe the formula in words.--TonyTheTiger (T/C/BIO/WP:CHICAGO/WP:FOUR) 20:27, 11 September 2012 (UTC)[reply]
I have made some edits to that paragraph to improve clarity based on your suggestions. John Shandy` • talk 02:33, 12 September 2012 (UTC)[reply]
More specifically, I changed that paragraph (from its second sentence to its end), to the following based on your suggestion of giving a better prose explanation of the mechanics involved:

The following equation represents covered interest rate parity, a condition under which investors eliminate exposure to exchange rate risk (unanticipated changes in exchange rates) with the use of a forward contract - the exchange rate risk is effectively covered. Under this condition, a domestic investor would earn equal returns from investing in dollar assets or converting currency at the spot exchange rate, investing in foreign currency assets in a country with a higher interest rate, and exchanging the foreign currency for dollars at the negotiated forward exchange rate. A similar relationship holds for a foreign investor considering dollar assets. Investors will be indifferent to the interest rates on deposits in these countries due to the equilibrium resulting from the forward exchange rate. The condition allows for no arbitrage opportunities because the dollar return on dollar deposits, 1+i$, is equal to the dollar return on euro deposits, F/S(1+ic). If these two returns weren't equalized by the use of a forward contract, there would be a potential arbitrage opportunity in which an investor could borrow currency in the country with the lower interest rate, convert to the foreign currency at today's spot exchange rate, and invest in the foreign country with the higher interest rate.

John Shandy` • talk 05:45, 16 September 2012 (UTC)[reply]
Do you mean why invest in the country with a higher interest rate after borrowing at a lower interest rate? John Shandy` • talk 17:43, 22 September 2012 (UTC)[reply]
Yes. Why not just different?--TonyTheTiger (T/C/BIO/WP:CHICAGO/WP:FOUR) 06:25, 25 September 2012 (UTC)[reply]
As per the assumptions of capital mobility and perfect substitutability in interest rate parity, an investor would be expected to hold those assets offering greater returns, regardless of whether they are domestic or foreign assets. In other words, an investor wouldn't be expected to a country with a lower return (lower interest rate). When I wrote the Under this condition, sentence into the paragraph, I was trying to convey that if an investor attempted an arbitrage (by borrowing lower, investing higher), they would instead earn equal returns. Though F/S would equalize the two returns, it's an unrealistic scenario that an investor would chase lower returns and isn't touched on by the sources (particularly Feenstra & Taylor 2008), which was why I used higher interest rate. However, I see how this could be unclear or distracting to the reader, so I have changed the paragraph to use different interest rate rather than higher interest rate in the first instance and added for example, to the last sentence of the paragraph. John Shandy` • talk 06:58, 25 September 2012 (UTC)[reply]
I have corrected the hyphen to a spaced en dash. John Shandy` • talk 17:43, 22 September 2012 (UTC)[reply]
This typo has been corrected and the phrase is now wikilinked to liquidity premium. John Shandy` • talk 02:09, 12 September 2012 (UTC)[reply]
Forecasting future spot exchange rates
The statement is referencing the Diamandis et al. 2008 source: One of the most well known puzzles in empirical finance concerns the rejection of the hypothesis that the forward exchange rate is an unbiased predictor of the future spot exchange rate. So, I have made a correction to the statement (my addition is in bold) which should clarify what the puzzle is: The empirical rejection of the unbiasedness hypothesis is a well-recognized puzzle... John Shandy` • talk 18:02, 22 September 2012 (UTC)[reply]

Forward rate formula is confusing

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Currently it says:

id is the interest rate in domestic currency (base currency) if is the interest rate in foreign currency (quoted currency)

However whether it is domestic or foreign depends on whether it is a direct or indirect quote. There relation between base-domestic and foreign-quoted is not 100% true and will create confusion for readers. — Preceding unsigned comment added by Jakesee (talk • contribs) 15:56, 10 July 2015 (UTC)[reply]

Yea, I can see how that might be a little confusing. Perhaps we can clarify that the formula is written with the presumption of direct quoted exchange rates, or else we can do away with the parentheses altogether? They may not really be necessary. John Shandy` • talk 20:04, 10 July 2015 (UTC)[reply]

Peer review

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Should we subject this article to peer review? Lbertolotti (talk) 15:13, 12 August 2015 (UTC)[reply]

Dr. Vitale's comment on this article

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Dr. Vitale has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:


I would argue that most of the empirical evidence on the forward rate unbiasedness hypothesis is that it does not hold true. The references in this entry that support it are not very convincing (who really cares that it held in the 1920s? while cointegration analysis at best indicates that it holds over the long run). I would also add among the cited literature Froot and Frankel (QJE, 1989), as they provide an important decomposition of the forward bias. Finally, two more suggestions. Firstly, consider that in the notation P indicates both the forward premium and the risk premium. To avoid confusion you should use different symbols. Secondly, to have a better comprehension of the forward premium, P_N, in daily terms an analogous presentation of a version of the CIP valid for monthly or quarterly periods would be useful.


We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Vitale has expertise on the topic of this article, since he has published relevant scholarly research:


  • Reference : Francis Breedon & Dagfinn Rime & Paolo Vital, 2010. "A Transaction Data Study of the Forward Bias Puzzle," Working Paper 2010/26, Norges Bank.

ExpertIdeasBot (talk) 20:26, 24 September 2016 (UTC)[reply]

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