Abstract
In this paper contingent price theory is used to infer the fair present value of the future effective spot rate under free float and alternative permissible band regimes. It is shown that a given term structure cannot at the same time bring about an equilibrium in both controlled and free exchange markets. A controlled exchange rate is proven to be less sensitive to changes in expectations about the future effective spot rate than a freely floating rate, whereas the interest rate change needed to offset such a shift is smaller. It is inferred that under an admissible band regime, the effective control limits on the current spot rate can differ significanly from the government's declared intervention points.
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