Antonio Ruiz, a broker in the Bronx, failed to forward premiums
to the appropriate insurer.
The department, in a news release last month, said it had received numerous complaints about Brand's failure to forward premiums
, a direct violation of state law.
If each of the individual covariances that determine the forward premiums are zero, then the pure expectations hypothesis holds.
The second decomposition expressed the bond price in terms of the expected product of the prices of future short-term bonds and the product of individual forward premiums at each maturity.
Very loosely speaking, this expression relates the holding-period premium to the conditional covariance between expected future short prices and expected future forward premiums. Analogously, using the Fisher equation, we have from (30)
She argues that the model "accounts for many features of the nominal term structure of interest rates." Most importantly, from our perspective, the model-based forward premiums that Wachter computes help to account for the empirical disparity between long-term rates and the corresponding average of expected future short-term rates--that is, the violation of the pure expectations hypothesis.
In addition, many of the early forward delivery bonds involved a fairly high forward premium. The forward premium on a forward delivery bond is composed of two components, a liquidity premium and a forward rate premium.
The authority also wanted a bond that would have a reasonably small forward premium. In 1990, Wall Street was told that there were two bond issues in particular that the Port Authority wanted to refund on a streamlined forward delivery basis: the $100 million, 10 1/8 percent consolidated bonds, 50th series, first callable in December 1992, and the $100 million, 11 percent consolidated bonds, 51st series, first callable in June 1994.
The difference between the two is called the forward premium, and it is shaped by such factors as the level of long-term and short-term rates and the shape of the yield curve.
This translates into high forward premium for the low interest advanced economy currency, which increases with the duration of the forward contract via the covered interest parity condition.
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.
Following the evidence of the presence of volatility clusters, we need to look at forward premium movement during such periods.