Question

Please fully explain that you agree or disagree that forward rate is the best method to predict the exchange rate?

Answer 1

Forward rate agreement is one of the derivative instruments. In this arrangement, we fix the price for the future transaction. It ie mainly used for hedging purposes. But coming to the point of predicting the exchange rate, i totally disagree with the statement that forward rate is the best method for predicting since, forward rate is theoritical rate based on the assumption that the interest rates will not change over time and based on the interest rate parity theory. Hence, practically it cannot predict the exchange rate, rather it might reduce the losses and can be used for hedging purposes.