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FORWARD RISK PREMIA AND THE MATURITY OF CONTRACTS: A NOTE
Author(s) -
Fatemi Ali M.,
Tavakkol Amir
Publication year - 1992
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1002/j.1873-5924.1992.tb00560.x
Subject(s) - forward rate , maturity (psychological) , risk premium , economics , spot contract , variance (accounting) , currency , liberian dollar , us dollar , econometrics , forward contract , libor market model , variation (astronomy) , liquidity premium , monetary economics , financial economics , interest rate , finance , market liquidity , psychology , developmental psychology , physics , accounting , astrophysics , liquidity crisis , futures contract
This paper examines the behavior of the risk premium component of currency forward rates. Analyzing forward rates of one, two and three‐month maturity, we find that the power of forward rate as a predictor of future spot rate decreases with the length of contract maturity. Further, we find that the proportion of the variance of the forward premium which is due to the variation of the risk premium is larger than the proportion due to the expected spot rate change for all currencies except for the Canadian dollar. This proportion also increases with the length of maturity.