ABSTRACT
The implications of regarding the exchange rate as an asset price were considered in C hapter 6. One particular aspect of asset prices is that they are usually regarded as being determined in efficient markets and it seems natural to ask whether the foreign exchange m arket behaves in a m anner consistent with the efficient markets hypothesis (EM H). M ore specifically, are forward exchange rates unbiased predictors of future exchange rates? Is the m arket using all relevant information in forming its expectations of future spot rates? A re unexpected changes in the exchange rate random? Does the exchange rate follow a random walk (indeed does m arket efficiency necessarily imply random exchange rate changes)? Such are the issues considered in this and the next two chapters. The main thrust of the present chapter is in term s of the relationship between spot and forward exchange rates implied by m arket efficiency.
