The Spot-Forward Exchange Rate Relation in Indian Foreign Exchange Market- An Analysis
Published: 2014
Author(s) Name: Golaka C. Nath |
Author(s) Affiliation: Senior Vice President, CCIL, Mumbai, Maharashtra, India.
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Abstract
Forward exchange rate bias explanation generally falls into two categories–assumption of rational expectation resulting in a risk premium and expectation errors which is systematic. The paper tests the bias in the Indian forward exchange markets using one-month
and three month forward contracts. The study finds that the three month contracts have larger prediction errors than the one-month contracts. The paper also finds that the prediction errors have information content which leads to assume the presence of risk premium. The study also finds that one-month contracts have lesser variability in risks vis-a-vis the three month contracts.
Keywords: Forward Exchange Rate, India, CCIL, Bias, Puzzle, Exchange Rate Premium, Exchange Rate
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