Question

An ineffective market is one in which prices do not reflect all available information, so forward exchange rates will not be the best predictors of future spot exchange rates.
True or False?

Answer 1

Answer:

The statement is: False.

Explanation:

Many economists believe the foreign exchange market is efficient enough to set forward rates -rates applicable in the future, thus, it is non-sense to spend money on trying to forecast exchange rate changes in the short run. This is because different studies have shown that most forward rates predictions have been more accurate than publicly available information.

Efficiency is understood as the characteristic of a market to display all available public information in the assets price, according to the Efficient Market Hypothesis (EMH).