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The Relationship Between the Forward and the Realized Spot Exchange Rate in South Africa

In: Business Research

Author

Listed:
  • Chris Heerden

    (North-West University)

  • André Heymans

    (North-West University)

  • Paul Styger

    (North-West University)

Abstract

This chapter investigates the exchange rate puzzle following an experimental research strategy to prove that the puzzle is a pseudo mystery. The exchange rate puzzle refers to the phenomenon that the forward exchange rate differs substantially from the realized future spot exchange rate. The reason for this difference is unclear because the forward exchange rate is determined by a combination of demand and supply factors and a mechanistic estimation based on the current spot exchange rate and the carry cost of the transaction. Since market participants use the current forward exchange rate to make decisions about future exchange rate changes, significant differences between the current forward exchange rate and the realized spot rate could lead to significant losses. To solve this problem, the study scrutinizes current exchange rate theories in developing an exchange rate model based only on current (time t) economic fundamentals that include the interaction of two international financial markets in the model. To investigate the implications of this model and its application in practice, this research had to question existing methodologies for their ability to solve the problem. Therefore, the research approach that best suited this investigation was a deductive approach, following a positivist research philosophy.

Suggested Citation

  • Chris Heerden & André Heymans & Paul Styger, 2023. "The Relationship Between the Forward and the Realized Spot Exchange Rate in South Africa," Springer Books, in: Pieter W. Buys & Merwe Oberholzer (ed.), Business Research, chapter 0, pages 99-115, Springer.
    • Handle: RePEc:spr:sprchp:978-981-19-9479-1_6
    DOI: 10.1007/978-981-19-9479-1_6
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    More about this item

    Keywords

    Deductive approach; Experimental research; Forward exchange rate; Realized future spot exchange rate;
    All these keywords.

    JEL classification:

    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G00 - Financial Economics - - General - - - General
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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