PROFITS, RISK, AND UNCERTAINTY IN FOREIGN-EXCHANGE MARKETS

This paper examines the properties of nominal profits from speculation in dollar-dominated forward contracts using a representative agent ca sh-in-advance model, modified to allow for heteroscedasticity in the e xogenous processes. The model is simulated by estimating exogenous pro cesses from the data and the remaining free parameters with a simulate d method-of-moments technique. Simulated expected profits are variable , heteroskedastic, and serially correlated, but the magnitude of these second moments fall short of those of the predictable component of ob served profits on the U.S. dollar. As in the actual data simulated for ward rates display biasedness in predicting simulated future spot rate s.