An Empirical Examination of Risk Premiums in the Indian Currency Futures Market

2017 ◽  
Vol 0 (0) ◽  
Author(s):  
Satish Kumar
Keyword(s):  
Risk Premium ◽  
Foreign Currency ◽  
Futures Market ◽  
Spot Rate ◽  
Interest Rate Parity ◽  
Empirical Examination ◽  
Risk Premiums ◽  
Forward Premium Anomaly ◽  
Currency Futures ◽  
Spot Exchange Rate

AbstractIn this paper, we examine whether risk premiums are significant in explaining the deviations from the uncovered interest rate parity (UIP) condition in an emerging Indian currency futures market. In particular, we explore the unbiasedness of futures quotes as a predictor of the future spot exchange rate to understand the forward premium anomaly condition. We report huge deviations from the UIP condition for all currencies considered and show that these deviations are explained by the risk premium. The realized risk premiums for all currencies are found to be negative and significantly different from zero, which suggests that investors are awarded for taking short positions in the foreign currency. The realized risk premiums in turn are found to be negatively related to the current spot rate returns and positively to the futures premium, conditional variance of spot rate returns, and the dividend yield.

scholarly journals Tendenciosidade do Mercado Futuro de Câmbio: Risco Cambial ou Erros Sistemáticos de Previsão?

2006 ◽  
Vol 4 (2) ◽  
pp. 123
Author(s):  
Daniel Chrity ◽  
Márcio G. P. Garcia ◽  
Marcelo Cunha Medeiros
Keyword(s):  
International Finance ◽  
Risk Premium ◽  
Futures Market ◽  
Forward Rate ◽  
Prediction Errors ◽  
Spot Rate ◽  
Currency Risk ◽  
Future Change ◽  
The Future ◽  
The Difference

The forward exchange rate is widely used in international finance whenever the analysis of the expected depreciation is needed. It is also used to identify currency risk premium. The difference between the spot rate and the forward rate is supposed to be a predictor of the future movements of the spot rate. This prediction is hardly precise. The fact that the forward rate is a biased predictor of the future change in the spot rate can be attributed to a currency risk premium. The bias can also be attributed to systematic errors of the future depreciation of the currency. This paper analyzes the nature of the risk premium and of the prediction errors in using the forward rate. It will look into the efficiency and rationality of the futures market in Brazil from April 1995 to December 1998, a period of controled exchange rates.

Volatility in the Foreign Currency Futures Market

1991 ◽  
Vol 4 (3) ◽  
pp. 543-569 ◽  
Author(s):  
Campbell R. Harvey ◽  
Roger D. Huang
Keyword(s):  
Foreign Currency ◽  
Futures Market ◽  
Currency Futures

Evidence of Risk Premiums in Foreign Currency Futures Markets

1992 ◽  
Vol 5 (1) ◽  
pp. 65-83 ◽  
Author(s):  
Thomas H. McCurdy ◽  
Ieuan Morgan
Keyword(s):  
Futures Markets ◽  
Foreign Currency ◽  
Risk Premiums ◽  
Currency Futures

Seasonalities and intraday return patterns in the foreign currency futures market

1995 ◽  
Vol 19 (5) ◽  
pp. 843-869 ◽  
Author(s):  
Marcia Millon Cornett ◽  
Thomas V. Schwarz ◽  
Andrew C. Szakmary
Keyword(s):  
Foreign Currency ◽  
Futures Market ◽  
Currency Futures

scholarly journals Historical Exchange Rate Risk Premiums In Currency Futures Markets

2011 ◽  
Vol 1 (1) ◽  
Author(s):  
Ahmet Can Inci
Keyword(s):  
Risk Premium ◽  
Futures Markets ◽  
Extreme Case ◽  
Total Sample ◽  
Font Size ◽  
Forecast Horizon ◽  
Expectations Hypothesis ◽  
Risk Premiums ◽  
Currency Futures ◽  
Transaction Fees

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt; mso-pagination: none;"><span style="font-family: Times New Roman;"><span style="font-size: 10pt; mso-bidi-font-weight: bold; mso-bidi-font-style: italic; mso-bidi-font-size: 12.0pt;">This paper examines the historical predictive power of future spot spread in estimating currency changes.<span style="mso-spacerun: yes;">&nbsp; </span></span><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-bidi-font-size: 9.5pt;">Currency futures and spot rates over the last two decades are examined.<span style="mso-spacerun: yes;">&nbsp;&nbsp; </span>Results show that as forecast horizon of currency depreciation increases, the slope coefficients become less positive, first losing their significance, and eventually for 1-month regressions, becoming negative for the British pound, Swiss franc and Japanese yen (significantly negative for the yen) indicating risk premiums differ with forecast horizon.<span style="mso-spacerun: yes;">&nbsp; </span>On the other hand, expectations hypothesis is validated when the forecast horizon is 1 day.<span style="mso-spacerun: yes;">&nbsp; </span>These results hold for each decade separately, as well as the total sample.<span style="mso-spacerun: yes;">&nbsp; </span>Comparison of early (1980s) and recent (1990s) periods reveals expectations hypothesis is validated in the recent period.<span style="mso-spacerun: yes;">&nbsp; </span>This indicates the trend towards a more efficient market.<span style="mso-spacerun: yes;">&nbsp; </span>This should not be very surprising with the introduction of round the clock electronic trading medium and reduction of transaction fees in futures markets.<span style="mso-spacerun: yes;">&nbsp; </span>This also implies that the absolute value of the risk premium has decreased over the last two decades.<span style="mso-spacerun: yes;">&nbsp; </span>The extreme case of forward premium puzzle in one-month forecasts diminishes in the 1990s.<span style="mso-spacerun: yes;">&nbsp; </span>The results are robust to partitioning the sample period into four sub samples and separating the data based on maturity of futures contracts.</span></span><strong><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-bidi-font-size: 12.0pt;"></span></strong></p>

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