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Foreign Exchange Forward and Futures Prices: Are They Equal?

Listed author(s):
  • Dezhbakhsh, Hashem

Small sample t -test results are reported in the literature that indicate the difference between futures and forward exchange rates are statistically insignificant. Much research draws on this finding, which is in contrast with theory. The evidence presented here suggests this difference does not follow a normal distribution, so the small sample inferences based on the t -tests may be suspect. As appropriate alternatives, nonparametric distribution-free tests are used to reexamine the difference for two sample periods, one covering the 1970s and the other the 1970s and 1980s. A significant divergence is observed for several currencies as well as for a sample of pooled currencies. The results are stronger for samples covering the 1980s. The economic significance of the forward-futures differentials is examined and theoretical justifications are discussed.

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Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 29 (1994)
Issue (Month): 01 (March)
Pages: 75-87

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Handle: RePEc:cup:jfinqa:v:29:y:1994:i:01:p:75-87_00
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