scholarly journals Modelling Electricity Swaps with Stochastic Forward Premium Models

2016 ◽  
Author(s):  
Ivvn Blanco ◽  
Juan Ignacio Peea
Keyword(s):  
Forward Premium

Can country-specific interest rate factors explain the forward premium anomaly?

2020 ◽  
Author(s):  
Efthymios Argyropoulos ◽  
Nikolaos Elias ◽  
Dimitris Smyrnakis ◽  
Elias Tzavalis
Keyword(s):  
Interest Rate ◽  
Specific Interest ◽  
Forward Premium Anomaly ◽  
Forward Premium ◽  
Country Specific

scholarly journals The Currency Carry Trade: Selection Skill or Behavioral Bias

2016 ◽  
Vol 9 (9) ◽  
pp. 176
Author(s):  
Ian Hudson
Keyword(s):  
Interest Rate ◽  
Efficient Market Hypothesis ◽  
Arbitrage Pricing Theory ◽  
Carry Trade ◽  
Interest Rate Parity ◽  
Forward Premium ◽  
Investment Returns ◽  
Pricing Theory ◽  
Premium Puzzle

<p>Many attempts have been undertaken to solve the forward premium puzzle with little to no success. The global currency market is considered the most information efficient and transparent of all financial markets since it demonstrates a balance between over and under-reaction to information with remarkable consistency. The Efficient Market Hypothesis espouses investors cannot systematically outperform a benchmark since all investors have access to the same information. Therefore, the expected long-term rate of return for currencies is essentially zero. The Arbitrage Pricing Theory asserts investment returns are random. As such, traders cannot avail themselves of mispriced currencies. The assertion of Uncovered Interest Rate Parity is that bi-national interest rate variance is equal to the expected differential in exchange rates. This paper asks the following questions: does alpha persistence exist in currency carry trade funds or are its excess returns merely a collection of behavioral biases?</p>

scholarly journals A NOTE ON THE FORWARD AND THE EQUITY PREMIUM PUZZLES: TWO SYMPTOMS OF THE SAME ILLNESS?

2013 ◽  
Vol 19 (2) ◽  
pp. 446-464 ◽  
Author(s):  
Carlos E. da Costa ◽  
João V. Issler ◽  
Paulo F. Matos
Keyword(s):  
Euler Equations ◽  
Equity Premium ◽  
Financial Data ◽  
Stochastic Discount Factor ◽  
Foreign Markets ◽  
Forward Premium Puzzle ◽  
Forward Premium ◽  
Premium Puzzle ◽  
The Moment ◽  
Moment Restrictions

We build a stochastic discount factor—SDF—using U.S. domestic financial data only, and provide evidence that it accounts for stylized facts about foreign markets that escape SDFs generated by consumption-based models. When our SDF is interpreted as the projection of the pricing kernel from a fully specified model in the space of returns, our results indicate that a model that accounts for the behavior of domestic assets goes a long way toward accounting for the behavior of foreign asset prices. In our tests, we address predictability, a defining feature of the forward premium puzzle—FPP—by using instruments that are known to forecast excess returns in the moment restrictions associated with Euler equations both in the equity and in the foreign markets.

Assessing the application of Islamic and conventional hedgings in Indonesia

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Rifki Ismal
Keyword(s):  
Exchange Rate ◽  
Quantitative Research ◽  
Money Market ◽  
Currency Hedging ◽  
Content Type ◽  
Forward Premium ◽  
Market Rate ◽  
Qualitative Research Methodology ◽  
Forward Contract ◽  
Static Simulation

Purpose Banks in Indonesia offer two currency-hedging mechanisms to business players to hedge their portfolio against exchange rate risk, namely, Islamic hedging and conventional hedging. Taking into account that Islamic finance stakeholders in Indonesia want to accelerate Islamic hedging transactions, assessing the feasibility of Islamic hedging to serve the business players is very important. Thus, this paper aims to compare the conventional and Islamic currency-hedging mechanisms, particularly to identify which one to be preferred by the business players, identify terms and conditions if Islamic hedging is more preferable, give information regarding the estimated profit and payment of the premium in adopting currency-hedging (both conventional and Islamic hedgings) and prove the workability of Islamic currency-hedging as a new hedging mechanism for the business players. Design/methodology/approach The paper uses qualitative research methodology by comparing Islamic and conventional hedging and a quantitative research method by using a forward contract formula. Technically, the paper conducts a static simulation of the forward transactions by using both conventional and Islamic hedgings to hedge the foreign exchange (forex) credit received by business players from banks. The forward contract simulation uses US dollar (USD) against Indonesian rupiah (IDR) from December 2003 to February 2019 and the forward premium uses both Islamic and conventional money market rates called PUAB (conventional interbank money market) rate and PUAS (Islamic interbank money market) rate. Findings The paper finds that Islamic hedging is more preferable to conventional one due to some considerations which are the number of profitable months, the minimum payment of premium and the highest payment of profit. However, even though the Islamic hedging mechanism has the advantage of having a higher Islamic money market rate than the conventional one, the economic condition (particularly the movement of IDR exchange rate) has to be considered as well particularly during the volatile exchange rate movement. Research limitations/implications The paper has not occupied macroeconomic variables such as inflation, GDP, international trade, as they might influence the movement of IDR exchange rate. In addition, it uses static simulation rather than a dynamic one. Originality/value This is the first paper assessing both Islamic and conventional hedging mechanisms in the case of Indonesia

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