A pioneering exploration of the relevance of economic theory to
the practical realities of the foreign exchange market, this volume
presents a well-reasoned, comprehensive examination of the degree
to which economic theories and forecasts are helpful in predicting
exchange rates. Douch, an economist who has worked closely with the
foreign exchange market, argues that theoretical economic models
have exhibited some serious inadequacies in forecasting the future.
In an attempt to determine the real predictive value of economic
theory in this context, Douch examines each of the different
economic approaches in-depth and then analyzes the actual workings
of the foreign exchange market from the perspective of the market
participants. Particular emphasis is placed upon the reasons for
the observed failure of economic theory to reliably predict
exchange rate movements over time.
Divided into three major sections, the book begins with five
chapters that describe and evaluate the different economic
approaches to explaining exchange rate movements. The next two
chapters link the theories of the first section with the practical
realities of the third by discussing the advantages of fixed and
floating exchange rates and presenting a brief history of exchange
rate regimes since World War II. In the final section, Douch first
looks at how the spot and forward exchange rate markets actually
work by examining the motives of market participants. Subsequent
chapters explore such issues as whether Game Theory might be used
to explain market actions, the effect of new foreign exchange
hedging instruments on the market, and the contribution of Chart
Analysis to exchange rate forecasts. A detailed appendix defines
various economic indicators and seeks to explain how the market
might react to them and why. Advanced students of economics as well
as foreign exchange market participants with little economic
training will find here important new insights into when economic
theories can be helpful in predicting exchange rates--and, even
more importantly, when they can not.
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