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Empirical verification of the theory of forward rate
In 2012, the Czech koruna celebrated twenty years since its inception. During this time it went
through systems of various exchange rates. While fixed system was implemented at the beginning
of its existence, since 1997 the Czech Koruna has moved to a system that allows greater exchange
rate volatility. Businesses must cope with this volatility, and therefore seek appropriate methods of
forecasting future exchange rate movements. One of the methods is forecast by forward rates. The
indisputable advantage of this method is the low cost associated with the detection of forward
exchange rate for the most traded currency pairs.
The euro and dolar are the most important currencies in the Czech republic for foreign trade.
Con-sequently it is necessary to forecast exchange rates for the Czech Koruna and USD and Euro.
One of the tools for forecasting the future spot rate is the forward rate. In this paper, we verify the
hypothesis the forward rate does not provide long-term profit. Our validation is based on the design
of error correction model for exchange rates CZK/USD and CZK/EUR in 2001–2011