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Asia-Pacific Journal of Risk and Insurance

The Official Journal of the Asia-Pacific Risk and Insurance Association

Editor-in-Chief: Kwon, W. Jean

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2153-3792
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An Empirical Examination of Risk Premiums in the Indian Currency Futures Market

Satish KumarORCID iD: http://orcid.org/0000-0001-5625-8877
Published Online: 2017-11-21 | DOI: https://doi.org/10.1515/apjri-2016-0031

Abstract

In this paper, we examine whether risk premiums are significant in explaining the deviations from the uncovered interest rate parity (UIP) condition in an emerging Indian currency futures market. In particular, we explore the unbiasedness of futures quotes as a predictor of the future spot exchange rate to understand the forward premium anomaly condition. We report huge deviations from the UIP condition for all currencies considered and show that these deviations are explained by the risk premium. The realized risk premiums for all currencies are found to be negative and significantly different from zero, which suggests that investors are awarded for taking short positions in the foreign currency. The realized risk premiums in turn are found to be negatively related to the current spot rate returns and positively to the futures premium, conditional variance of spot rate returns, and the dividend yield.

Keywords: currency futures markets; risk premium; uncovered interest rate parity; unbiasedness

JEL Classification: F31; G13; G15

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About the article

Published Online: 2017-11-21


Citation Information: Asia-Pacific Journal of Risk and Insurance, Volume 12, Issue 1, 20160031, ISSN (Online) 2153-3792, DOI: https://doi.org/10.1515/apjri-2016-0031.

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