Expectations theory

Expectations theory states that the best measure of the market's average expectation of the outturn spot foreign exchange rate at a given future date is the current market forward rate for the same maturity.

Expectations theory also applies in the interest rate market, and indeed in any market where forward prices are quoted.

So for example in the interest rate market, expectations theory suggests that the current market forward interest rate is the best measure of the average market expectation of the outturn spot interest rate at the given future date.

See also

• Carry trade
• CPI fixing swap
• Fisher Effect
• Four way equivalence model
• Forward rate
• Inflation swap
• Interest rate parity
• International Fisher Effect
• Outturn
• Purchasing power parity
• Rational expectations
• Spot rate
• Yield curve