The random walk hypothesis suggests that
A)the best predictor of the future exchange rate is the current exchange rate.
B)the best predictor of the future exchange rate is the current forward rate.
C)the best predictors of the future exchange rate are the current exchange rate and the current forward rate.
D)none of the options

Question

Quizplus · Accepted Answer

The random walk hypothesis suggests that future movements of an exchange rate are unpredictable and that the best predictor of the future exchange rate is the current exchange rate. Therefore, choice A is the correct answer. The current forward rate may reflect market expectations and other factors that could influence the future exchange rate, but the random walk hypothesis suggests that these factors are already reflected in the current exchange rate. Choice C is incorrect because it suggests that the current forward rate could improve the prediction of the future exchange rate, which is not supported by the random walk hypothesis. Choice D is also incorrect as it suggests that there is no way to predict the future exchange rate, which is not entirely accurate as some models and approaches can provide some guidance, although they may not be entirely reliable or consistent.

The Random Walk Hypothesis Suggests That