Revision with unchanged content. As many countries switched from fixed towards floating exchange rate systems the need for analyzing spot exchange rate movements became increasingly more important. This study examines the fundamental question of international finance of whether the forward rate can be used as an unbiased predictor of the future spot rate for a given currency. A particular focus is set on devising econometric time series models to explain the short run dynamic adjustment of spot exchange rates towards their long run equilibrium level that is dictated by the Unbiased Forward Rate Hypothesis (UFRH). This analysis should help to answer the questions: ? Is there supporting evidence for the UFRH in the long run? ? Can the term structure of the forward rates be used to predict short run dynamic movements of the spot rates? ? Should the adjustment of exchange rates towards equilibrium levels dictated by a fundamental theory follow nonlinear form?