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Future exchange rates and Siegel's paradox

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  • Mallahi-Karai, Keivan
  • Safari, Pedram

Abstract

Siegel's paradox is a fundamental question in international trade about exchange rates for futures contracts and has puzzled many scholars for over forty years. The unorthodox approach presented in this article leads to an arbitrage-free solution which is invariant under currency re-denominations and symmetric, as explained. We will also give a complete classification of all such aggregators in the general case. The formula obtained in this setting therefore describes all the negotiated no-arbitrage forward exchange rates in terms of a reciprocity function.

Suggested Citation

  • Mallahi-Karai, Keivan & Safari, Pedram, 2018. "Future exchange rates and Siegel's paradox," Global Finance Journal, Elsevier, vol. 37(C), pages 168-172.
    • Handle: RePEc:eee:glofin:v:37:y:2018:i:c:p:168-172
    DOI: 10.1016/j.gfj.2018.04.007
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    References listed on IDEAS

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    1. Jeremy J. Siegel, 1972. "Risk, Interest Rates and the Forward Exchange," The Quarterly Journal of Economics, Oxford University Press, vol. 86(2), pages 303-309.
    2. Don E. Roper, 1975. "The Role of Expected Value Analysis for Speculative Decisions in the Forward Currency Market," The Quarterly Journal of Economics, Oxford University Press, vol. 89(1), pages 157-169.
    3. Edlin Aaron S., 2002. "Forward Discount Bias, Nalebuff's Envelope Puzzle, and the Siegel Paradox in Foreign Exchange," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 2(1), pages 1-11, September.
    4. Gollier, Christian & Weitzman, Martin L., 2010. "How should the distant future be discounted when discount rates are uncertain?," Economics Letters, Elsevier, vol. 107(3), pages 350-353, June.
    5. Edlin, Aaron S., 2002. "Forward Discount Bias, Nalebuff's Envelope Puzzle, and the Siegel Paradox in Foreign Exchange," Berkeley Olin Program in Law & Economics, Working Paper Series qt2wc1p9pw, Berkeley Olin Program in Law & Economics.
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    Cited by:

    1. Djeutem, Edouard & Dunbar, Geoffrey R., 2022. "Uncovered return parity: Equity returns and currency returns," Journal of International Money and Finance, Elsevier, vol. 128(C).
    2. Djeutem, Edouard & Dunbar, Geoffrey R., 2022. "Uncovered return parity: Equity returns and currency returns," Journal of International Money and Finance, Elsevier, vol. 128(C).

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    More about this item

    Keywords

    Forward exchange rates; discount bias;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines

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