Forward Premium Puzzle: Futures Contracts Evidence and Speculation Strategies

Alina Piciorea

No 8, Advances in Economic and Financial Research - DOFIN Working Paper Series from Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB

Abstract: Almost thirty years ago, researchers found the forward exchange rate to be a biased predictor of the future spot exchange rate. Worse, in a regression of the future change in the spot rate against the forward discount, the exchange rate was found on average to move in precisely the opposite direction from what was predicted. This surprising finding has been replicated many times since, on many sets of data, and with many refinements. We propose to bring new evidence in support of the forward premium puzzle by using the futures contracts instead of the forward ones and then to quantify the economical significance of UIP failure, by exploring two currency speculation strategies.

Keywords: Forward; Premium; Puzzle (search for similar items in EconPapers)
Date: 2008-05
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