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Forex contracts involve the right to buy or sell a certain amount of a foreign currency at a fixed price in U. It is extremely rare that individual traders actually see the foreign currency.
This reduces rounding issues and the need to use excessive numbers of decimal places.
There are some exceptions to this rule: for example, the Japanese often quote their currency as the base to other currencies.
This is the exchange rate (expressed as dollars per euro) times the relative price of the two currencies in terms of their ability to purchase units of the market basket (euros per goods unit divided by dollars per goods unit).
If all goods were freely tradable, and foreign and domestic residents purchased identical baskets of goods, purchasing power parity (PPP) would hold for the exchange rate and GDP deflators (price levels) of the two countries, and the real exchange rate would always equal 1.
There are various ways to measure RER. Thus the real exchange rate is the exchange rate times the relative prices of a market basket of goods in the two countries.
For example, the purchasing power of the US dollar relative to that of the euro is the dollar price of a euro (dollars per euro) times the euro price of one unit of the market basket (euros/goods unit) divided by the dollar price of the market basket (dollars per goods unit), and hence is dimensionless.
Authors test the suggested model on high-frequency time series data of USD/CAD and examine the ability to forecast exchange rate values for the horizon of one day.
To determine the forecasting efficiency, they perform a comparative statistical out-of-sample analysis of the tested model with autoregressive models and the standard neural network.
Individual traders comprise a very small part of this market.