Talk:Forward exchange rate/GA1

GA Review

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Reviewer: TonyTheTiger (talk · contribs) 14:32, 10 September 2012 (UTC)

• I will do this review.--TonyTheTiger (T/C/BIO/WP:CHICAGO/WP:FOUR) 14:32, 10 September 2012 (UTC)

WP:LEAD

• I would change the first sentence: The forward exchange rate (also referred to as forward rate or forward price) is the rate at which a bank is willing to commit to exchange one currency for another at some specified future date.--TonyTheTiger (T/C/BIO/WP:CHICAGO/WP:FOUR) 12:45, 11 September 2012 (UTC)

I have added to commit to the sentence; I agree that it helps clarify or emphasize that it is a commitment for the future. John Shandy` • talk 19:11, 11 September 2012 (UTC)

• The LEAD does not adequately summarize the article. The final section is omitted from the lead.--TonyTheTiger (T/C/BIO/WP:CHICAGO/WP:FOUR) 16:40, 14 September 2012 (UTC)

I have expanded the lead to better summarize the article's sections, and reorganized wikilinks accordingly.John Shandy` • talk 19:26, 18 September 2012 (UTC)

Intro

• The article is poorly structured. It should start with a detailed explanation of what the Forward exchange rate is. (A summary of this introduction should be in the LEAD). Right now the intro is in the LEAD. Then the other sections can follow.--TonyTheTiger (T/C/BIO/WP:CHICAGO/WP:FOUR) 17:21, 22 September 2012 (UTC)

I have reorganized the sections, there is now an introduction section, and the lead has been condensed to give a summary of that section's most important parts. The new lead is shorter, but I feel it is of sufficient length without offering too much detail. I reorganized wikilinks accordingly and added new wikilinks along the way. John Shandy` • talk 05:24, 23 September 2012 (UTC)

Relation to covered interest rate parity

• 2ndd para does not have to repeat no-arbitrage condition.--TonyTheTiger (T/C/BIO/WP:CHICAGO/WP:FOUR) 12:45, 11 September 2012 (UTC)

I have removed the redundant no-arbitrage. John Shandy` • talk 19:11, 11 September 2012 (UTC)

• Move Spot exchange rate link to first use.--TonyTheTiger (T/C/BIO/WP:CHICAGO/WP:FOUR) 12:45, 11 September 2012 (UTC)

I have moved the wikilink to the first usage in the lead. John Shandy` • talk 19:11, 11 September 2012 (UTC)

• "The reason for the no-arbitrage condition is that the dollar return on dollar deposits, 1+i$, is set equal to the dollar return on euro deposits, F/S(1+ic). " is not explicit enough to be helpful to those looking to this article for clarification. A rectangular graphic would be helpful. However, it is important to describe parity as a condition in which a dollar investor will earn the same return by investing in dollar-return investments as he would earn converting to a foreign currency at the spot exchange rate, investing in foreign currency return investments and commiting to exchange the foreign returns at the forward exchange rate. A similar relationship holds for foreign investors with the dollar.--TonyTheTiger (T/C/BIO/WP:CHICAGO/WP:FOUR) 20:17, 11 September 2012 (UTC)
• I.e., describe the formula in words.--TonyTheTiger (T/C/BIO/WP:CHICAGO/WP:FOUR) 20:27, 11 September 2012 (UTC)

I have made some edits to that paragraph to improve clarity based on your suggestions. John Shandy` • talk 02:33, 12 September 2012 (UTC)

More specifically, I changed that paragraph (from its second sentence to its end), to the following based on your suggestion of giving a better prose explanation of the mechanics involved:

The following equation represents covered interest rate parity, a condition under which investors eliminate exposure to exchange rate risk (unanticipated changes in exchange rates) with the use of a forward contract - the exchange rate risk is effectively covered. Under this condition, a domestic investor would earn equal returns from investing in dollar assets or converting currency at the spot exchange rate, investing in foreign currency assets in a country with a higher interest rate, and exchanging the foreign currency for dollars at the negotiated forward exchange rate. A similar relationship holds for a foreign investor considering dollar assets. Investors will be indifferent to the interest rates on deposits in these countries due to the equilibrium resulting from the forward exchange rate. The condition allows for no arbitrage opportunities because the dollar return on dollar deposits, 1+i$, is equal to the dollar return on euro deposits, F/S(1+ic). If these two returns weren't equalized by the use of a forward contract, there would be a potential arbitrage opportunity in which an investor could borrow currency in the country with the lower interest rate, convert to the foreign currency at today's spot exchange rate, and invest in the foreign country with the higher interest rate.

John Shandy` • talk 05:45, 16 September 2012 (UTC)

• Why only higher?--TonyTheTiger (T/C/BIO/WP:CHICAGO/WP:FOUR) 17:26, 22 September 2012 (UTC)

Do you mean why invest in the country with a higher interest rate after borrowing at a lower interest rate? John Shandy` • talk 17:43, 22 September 2012 (UTC)

Yes. Why not just different?--TonyTheTiger (T/C/BIO/WP:CHICAGO/WP:FOUR) 06:25, 25 September 2012 (UTC)

As per the assumptions of capital mobility and perfect substitutability in interest rate parity, an investor would be expected to hold those assets offering greater returns, regardless of whether they are domestic or foreign assets. In other words, an investor wouldn't be expected to a country with a lower return (lower interest rate). When I wrote the Under this condition, sentence into the paragraph, I was trying to convey that if an investor attempted an arbitrage (by borrowing lower, investing higher), they would instead earn equal returns. Though F/S would equalize the two returns, it's an unrealistic scenario that an investor would chase lower returns and isn't touched on by the sources (particularly Feenstra & Taylor 2008), which was why I used higher interest rate. However, I see how this could be unclear or distracting to the reader, so I have changed the paragraph to use different interest rate rather than higher interest rate in the first instance and added for example, to the last sentence of the paragraph. John Shandy` • talk 06:58, 25 September 2012 (UTC)

• See WP:DASH for "... forward contract - the exchange rate risk is effectively covered."--TonyTheTiger (T/C/BIO/WP:CHICAGO/WP:FOUR) 17:26, 22 September 2012 (UTC)

I have corrected the hyphen to a spaced en dash. John Shandy` • talk 17:43, 22 September 2012 (UTC)

• "liquidity prem4ia". is obviously misspelled. It also needs a link or explanation.--TonyTheTiger (T/C/BIO/WP:CHICAGO/WP:FOUR) 21:15, 11 September 2012 (UTC)

This typo has been corrected and the phrase is now wikilinked to liquidity premium. John Shandy` • talk 02:09, 12 September 2012 (UTC)

Forecasting future spot exchange rates

• "The unbiasedness hypothesis is a well-recognized puzzle". Puzzle seems to be a misnomer.--TonyTheTiger (T/C/BIO/WP:CHICAGO/WP:FOUR) 17:32, 22 September 2012 (UTC)

The statement is referencing the Diamandis et al. 2008 source: One of the most well known puzzles in empirical finance concerns the rejection of the hypothesis that the forward exchange rate is an unbiased predictor of the future spot exchange rate. So, I have made a correction to the statement (my addition is in bold) which should clarify what the puzzle is: The empirical rejection of the unbiasedness hypothesis is a well-recognized puzzle... John Shandy` • talk 18:02, 22 September 2012 (UTC)

• Good work. I am able to PASS this article now.--TonyTheTiger (T/C/BIO/WP:CHICAGO/WP:FOUR) 15:41, 3 October 2012 (UTC)