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Recent Developments in International Currency Derivatives Market: Implications for Poland

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  • Lucjan T. Orlowski

Abstract

This paper examines the critical problems of international currency derivatives that have emerged in international financial markets over the past two years, emphasizing the departures of spot exchange rate movements from the macroeconomic fundamentals among the “triad” currencies: the U.S. Dollar (USD), the German Mark (DM), and the Japanese Yen (YE). The macroeconomic variables that theoretically play a predominant role in the exchange rate movements are: differences in comparable market interest rates among the countries (interest rate differentials), differences in the rate of growth of real GDP (income differentials), and differences in the rates of inflation (inflation differentials). The changeable sensitivity of exchange rates to these key variables is tested in this paper for the “triad” currencies in two periods: 1991-1993, and 1994-1995. In the latter period, some considerable misalignments between forward rates and changes in spot exchange rates are observed. This is contrary to the historical evidence of the validity of the so-called “unbiased forward rate hypothesis” claiming that forward rates are the best predictor of adjustments of spot rates (Levich, 1976). It is argued that the recently observed failure of the relationship between forward rates and lagged spot rates has contributed to significant losses of investors and speculators in international currency derivative markets.

Suggested Citation

  • Lucjan T. Orlowski, 1995. "Recent Developments in International Currency Derivatives Market: Implications for Poland," CASE Network Studies and Analyses 0055, CASE-Center for Social and Economic Research.
    • Handle: RePEc:sec:cnstan:0055
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    1. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-853, October.
    2. Jane Marrinan, 1989. "Exchange rate determination: sorting out theory and evidence," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 39-52.
    3. Lucjan T. Orlowski, 1995. "Preparations of the Visegrad Group countries for admission to the European Union: monetary policy aspects," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 3(3), pages 333-353, September.
    4. Levich, Richard M., 1985. "Empirical studies of exchange rates: Price behavior, rate determination and market efficiency," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 19, pages 979-1040, Elsevier.
    5. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
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    1. Ibañéz, Francisco & Romero-Meza, Rafael & Coronado-Ramírez, Semei & Venegas-Martínez, Francisco, 2016. "Innovaciones financieras en América Latina:Mercado de Derivados y Determinates de la Administración de Riesgo," Panorama Económico, Escuela Superior de Economía, Instituto Politécnico Nacional, vol. 0(22), pages 7-38, Primer se.

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    More about this item

    Keywords

    Poland; International Currency Derivatives; International Financial Markets;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • P20 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - General

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