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The Spot Forward Exchange Rate Relation in Indian Foreign Exchange Market - An Analysis

Nath, Golaka (2013): The Spot Forward Exchange Rate Relation in Indian Foreign Exchange Market - An Analysis.

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Abstract

Forward exchange rate bias explanation generally falls into two categories – assumption of rational expectation resulting in a risk premium and expectation errors which is systematic. The paper tests the bias in the Indian forward exchange markets using one-month and three month forward contracts. The study finds that the three month contracts have larger prediction errors than the one-month contracts. The also paper finds that the prediction errors have information content which leads to assume the presence of risk premium. The study also finds that risk one-month contracts have lesser variability vis-à-vis the three month contracts.

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