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The Spot Forward Exchange Rate Relation in Indian Foreign Exchange Market - An Analysis

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  • Nath, Golaka

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 also paper finds that the prediction errors have information content which leads to assume the presence of risk premium. The study also finds that risk one-month contracts have lesser variability vis-à-vis the three month contracts.

Suggested Citation

  • Nath, Golaka, 2013. "The Spot Forward Exchange Rate Relation in Indian Foreign Exchange Market - An Analysis," MPRA Paper 51591, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:51591
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    References listed on IDEAS

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    Cited by:

    1. Radim Gottwald, 2015. "The Forecasting of Spot Exchange Rates Based on the Forward Exchange Rates," MENDELU Working Papers in Business and Economics 2015-52, Mendel University in Brno, Faculty of Business and Economics.

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    More about this item

    Keywords

    forward exchange rate; India; CCIL; bias; puzzle; exchange rate premium; exchange rate;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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