Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/120791
Authors: 
Durham, J. Benson
Year of Publication: 
2014
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 665
Abstract: 
Forward foreign exchange contracts embed not only expected depreciation but also a sizable premium, which complicates inferences about anticipated returns. This study derives arbitrage-free affine forward currency models (AFCMs) with closed-form expressions for both unobservable variables. Model calibration to forward term structures of eleven U.S.-dollar currency pairs from the mid-to-late 1990s through early 2014 fits the data closely and suggests that the premium is indeed nonzero and variable, but not to the degree implied by previous econometric studies.
Subjects: 
arbitrage-free model
foreign exchange
JEL: 
G10
G12
G15
Document Type: 
Working Paper

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