25.4 EXCHANGE RATE DETERMINATION IN FORWARD MARKET
The forward exchange rate is normally not equal to the spot rate. The size of forward premium or discount mainly depends on the current expectation of future events. Such expectations determine the trend of the future spot rate towards appreciation or depreciation and thereby determine the forward rate that is equal to, or close to, the future spot rate. Suppose, the US dollar is expected to depreciate, the holders of US dollars will start selling it forward. These actions will help depress the forward rate of the US dollar. On the contrary, when the US dollar is expected to appreciate, holders will buy it forward and the forward rate will improve.
The IRP theory states that equilibrium is ...
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