Chapter 8

Foreign Exchange Risk and Forecasting


This chapter considers the issue of foreign exchange risk, which is the presence of risk that arises from uncertainty regarding the future exchange rate; this uncertainty makes forecasting necessary. If future exchange rates were known with certainty, there would be no foreign exchange risk. The various types of foreign exchange risk are explored by working through a real-world example. The effects of foreign exchange risk on the determination of forward exchange rates are then explored, clarifying the terms risk and risk aversion. Market efficiency is defined for the foreign exchange market, meaning that spot and forward exchange rates quickly adjust to any new information. Since future ...

Get International Money and Finance, 9th Edition now with the O’Reilly learning platform.

O’Reilly members experience live online training, plus books, videos, and digital content from nearly 200 publishers.