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Forward Risk Premia And The Maturity Of Contracts: A Note

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  • Ali M. Fatemi
  • Amir Tavakkol

Abstract

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.

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  • Ali M. Fatemi & Amir Tavakkol, 1992. "Forward Risk Premia And The Maturity Of Contracts: A Note," Review of Financial Economics, John Wiley & Sons, vol. 2(1), pages 93-97, September.
    • Handle: RePEc:wly:revfec:v:2:y:1992:i:1:p:93-97
    DOI: 10.1002/j.1873-5924.1992.tb00560.x
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    References listed on IDEAS

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