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Implied Foreign Exchange Risk Premia

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  • Nikolaos Panigirtzoglou
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    Abstract

    "This paper uses implied volatilities from foreign exchange option prices and the results of no-arbitrage theory to estimate foreign exchange risk premia. In particular, under the assumption of no-arbitrage, the foreign exchange risk premium is driven by the difference between investors' market prices of risk in the two currencies. In an international economy with three currencies, sterling, US dollar and Deutschemark, we can use the information on implied volatilities of the three cross rates to derive estimates of implied or ex ante market prices of risk and of foreign exchange risk premia. The foreign exchange risk premia estimates are then compared to survey-based risk premia." Copyright Blackwell Publishers Ltd, 2004.

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    Bibliographic Info

    Article provided by European Financial Management Association in its journal European Financial Management.

    Volume (Year): 10 (2004)
    Issue (Month): 2 ()
    Pages: 321-338

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    Handle: RePEc:bla:eufman:v:10:y:2004:i:2:p:321-338

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    Cited by:
    1. Kumar, Satish & Trück, Stefan, 2014. "Unbiasedness and risk premiums in the Indian currency futures market," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 29(C), pages 13-32.
    2. Carmen Gloria Silva, 2010. "Forward premium puzzle and term structure of interest rates: the case of New Zealand," Working Papers Central Bank of Chile, Central Bank of Chile 570, Central Bank of Chile.

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