1. Suppose that the forward premium equals the conditional expectation of the future rate of appreciation of the foreign currency relative to the domestic currency. If we form the average realized rate of appreciation from a large sample of data and compare it to the average forward premium, what should be true?
2. Explain how you would use a regression to test the unbiasedness hypothesis.
3. Suppose you regress the realized rate of appreciation of a foreign currency on a constant and the forward premium on the foreign currency. What interpretation can you give to the estimated slope coefficient? If the slope coefficient is negative, is it true that the forward premium is predicting the wrong sign for the rate of appreciation?