Forward premium


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Forward premium

A currency trades at a forward premium when its forward price is higher than its spot price.

Contango

A situation in which the futures price for an asset is higher than the expected future spot price. The futures price in contango declines to the future spot price as the futures contract approaches maturity. See also: Backwardation, Keynesian economics.
References in periodicals archive ?
From Maynard and Phillips (2001) we quote: "The difference in persistence between the short-memory spot return and long-memory forward premium does not admit a valid regression relation in returns and the slope coefficient in the Fama (1984) regression is found to converge to zero.
Behavioral Explanations for the Forward Premium Puzzle
As a result, when a contract is renewed/rolled over during a volatility cluster, the risk due to higher volatility is often reflected in higher forward premium, which makes hedging unattractive.
Forward premium anomaly refers to the empirical findings that changes in the spot exchange rate appear to be negatively correlated with the lagged forward premium or discount.
and it is straightforward to show that the forward premium is pinned down by the autocovariance properties of marginal utility, or equivalently by the covariance between the future short-term bond price and future marginal utility:
When we use the price changes for one quarter and include the forward premium, the hedge fails the test in 5 of the 12 quarters.
The forward premium, p, is defined as the difference between the expected and the forward price:
Figure 2 compares the forward premium with the change in the spot rate, using weekly data.
Note that the forward premium is obtained from the rolling premium by dividing both sides of the expression using [n1.
The forward premium on a forward delivery bond is composed of two components, a liquidity premium and a forward rate premium.
On each rollover date the value of the contracts increases with the accumulation of the forward premium (contango).
2] will measure the proportion of the variance of the forward premium which is due to the variance of the risk premium and that of the expected change in spot rate, respectively.