Behavioral Explanations for the Forward Premium
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:
The strategy is to write both F and p' in terms of E[p'] by using the definition of the forward premium
in equation (7) and the relation between next period's price and its current expectation in equation (6).
The forward premium
bias is the same phenomenon as the failure of uncovered interest parity.
Then, because the forward premium
is an optimal forecast and the information set used to make the forecast is at least as large as that implied by eq.
For the 19-month forward period, the bonds carried a relatively modest forward premium
over the spot bond market.
Eichenbaum, Northwestern University and NBER; and Sergio Rebelo, Northwestern University and NBER, Understanding the Forward Premium
Puzzle: A Microstructure Approach (NBER Working Paper No.
This approach is designed to benefit from the trend that on average currencies that trade at a forward discount tend to perform better than those that trade at a forward premium
A potential cost of the hedge is the forward premium
We were successful in locating several construction/perm programs which would fix today's interest rate with 75bp premium (a forward premium
for a long-term loan), involving multiple disbursements over a 24-month period," he said.
If exporters panic and begin selling dollars, then we could see the one-year forward premium
dropping to around 5 per cent," said Ravi Ranjit, Mumbai-based chief manager at Federal Bank.
Farhi and Gabaix propose a new model of exchange rates, which yields a theory of the forward premium