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Commodity Currencies: Why Are Exchange Rate Futures Biased if Commodity Futures Are Not?*
Author(s) -
KEARNS JONATHAN
Publication year - 2007
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.2007.00376.x
Subject(s) - futures contract , commodity , economics , exchange rate , commodity pool , contango , portfolio , commodity swap , monetary economics , forward market , financial economics , finance , market liquidity , passive management , fund of funds
This paper adds to the well‐documented puzzle of the forward bias of exchange rates. While the exchange rate of a small commodity‐exporting economy, such as Australia, can be closely tied to commodity prices, this paper demonstrates empirically that a portfolio of commodity futures exhibits little, if any, bias. A microfounded small open economy model is developed in which the exchange rate depends on export commodity prices. This is used to demonstrate how systematic expectation errors about the monetary process could cause the bias in exchange rate forwards when there is an absence of bias in commodity futures.