IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpif/0502008.html
   My bibliography  Save this paper

Recent Developments in International Currency Derivatives Market: Implications for Poland

Author

Listed:
  • Lucjan T. Orlowski

    (Sacred Heart University)

Abstract

This paper examines currency derivatives that have emerged in international financial markets over the past two years, emphasizing the departures of spot exchange rate movements from the macroeconomic fundamentals among the “triad” currencies: the U.S. Dollar (USD), the German Mark (DM), and the Japanese Yen (YE). Sensitivity of exchange rates to key macroeconomic variables (differentials in interest rates, income and inflation) is tested for the “triad” currencies in two periods: 1991-1993 and 1994-1995. In the latter period, some considerable misalignments between forward rates and changes in spot exchange rates are observed. This is contrary to the historical evidence of the validity of the so-called “unbiased forward rate hypothesis” claiming that forward rates are the best predictor of adjustments of spot rates (Levich, 1976). It is argued that the recently observed failure of the relationship between forward rates and lagged spot rates has contributed to significant losses of investors and speculators in international currency derivative markets. The examination of these relationships and the recent empirical developments provides useful lessons for the transition economies of Central and Eastern Europe in their attempts to construct viable modern financial markets. This study limits the scope of recommendations for developing financial markets to the conditions of Poland. It assumes that currency-based derivative transactions may play a pivotal role in reducing systemic risk of external trade and financial contracts in the Polish economy presently undergoing considerable structural adjustments aimed at promoting export and net capital inflows. It further argues that an introduction of financial derivatives in Poland shall be preceded by a construction of sound underlying security markets. A stable currency accompanied by low inflation is necessary prerequisites for a successful functioning of currency-based derivatives.

Suggested Citation

  • Lucjan T. Orlowski, 2005. "Recent Developments in International Currency Derivatives Market: Implications for Poland," International Finance 0502008, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpif:0502008
    Note: Type of Document - pdf; pages: 24. Revised version subsequently published as 'Recent developments in international currency derivatives', Chapter 12 in Brzezinski, Horst and Michael Fritsch, 'The Emergence and Evolution of Markets', E. Elgar, 1997, pp. 194-216
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/if/papers/0502/0502008.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-853, October.
    2. Jane Marrinan, 1989. "Exchange rate determination: sorting out theory and evidence," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 39-52.
    3. Lucjan T. Orlowski, 1995. "Preparations of the Visegrad Group countries for admission to the European Union: monetary policy aspects," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 3(3), pages 333-353, September.
    4. Levich, Richard M., 1985. "Empirical studies of exchange rates: Price behavior, rate determination and market efficiency," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 19, pages 979-1040, Elsevier.
    5. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ibañéz, Francisco & Romero-Meza, Rafael & Coronado-Ramírez, Semei & Venegas-Martínez, Francisco, 2016. "Innovaciones financieras en América Latina:Mercado de Derivados y Determinates de la Administración de Riesgo," Panorama Económico, Escuela Superior de Economía, Instituto Politécnico Nacional, vol. 0(22), pages 7-38, Primer se.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Charles van Marrewijk, 2004. "An introduction to international money and foreign exchange markets," International Finance 0410006, University Library of Munich, Germany.
    2. Simpson, Marc W. & Grossmann, Axel, 2014. "An examination of the forward prediction error of U.S. dollar exchange rates and how they are related to bid-ask spreads, purchasing power parity disequilibria, and forward premium asymmetry," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 221-238.
    3. Ross Levine, 1988. "The forward exchange rate bias: a new explanation," International Finance Discussion Papers 338, Board of Governors of the Federal Reserve System (U.S.).
    4. Newbold, Paul & Wohar, Mark E. & Rayner, Tony & Kellard, Neil & Ennew, Christine, 1998. "Two puzzles in the analysis of foreign exchange market efficiency," International Review of Financial Analysis, Elsevier, vol. 7(2), pages 95-111.
    5. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    6. Levine, Ross, 1989. "The pricing of forward exchange rates," Journal of International Money and Finance, Elsevier, vol. 8(2), pages 163-179, June.
    7. Grossmann, Axel & Simpson, Marc W., 2015. "Bid-ask spreads, deviations from PPP and the forward prediction error: The case of the British pound and the euro," The Quarterly Review of Economics and Finance, Elsevier, vol. 55(C), pages 124-139.
    8. Alejandro Islas-Camargo & Willy Walter Cortez & Tania Pamela Sanabria Flores, 2018. "Is Mexico's Forward Exchange Rate Market Efficient?," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 13(2), pages 273-289, Abril-Jun.
    9. Hansen, Lars Peter, 2013. "Uncertainty Outside and Inside Economic Models," Nobel Prize in Economics documents 2013-7, Nobel Prize Committee.
    10. Coudert, Virginie & Mignon, Valérie, 2013. "The “forward premium puzzle” and the sovereign default risk," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 491-511.
    11. Scholl, Almuth & Uhlig, Harald, 2008. "New evidence on the puzzles: Results from agnostic identification on monetary policy and exchange rates," Journal of International Economics, Elsevier, vol. 76(1), pages 1-13, September.
    12. Zhiguang Wang & Prasad Bidarkota, 2012. "Risk premia in forward foreign exchange rates: a comparison of signal extraction and regression methods," Empirical Economics, Springer, vol. 42(1), pages 21-51, February.
    13. Kerstin Bernoth & Jürgen von Hagen & Casper G. de Vries, 2007. "The Forward Premium Puzzle only emerges gradually," Tinbergen Institute Discussion Papers 07-033/2, Tinbergen Institute.
    14. Berg, Kimberly A. & Mark, Nelson C., 2018. "Measures of global uncertainty and carry-trade excess returns," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 212-227.
    15. Heeho Kim, 2013. "Uncertainty and risk premium puzzle," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(1), pages 62-79, January.
    16. Richard H. Clarida & Mark P. Taylor, 1997. "The Term Structure Of Forward Exchange Premiums And The Forecastability Of Spot Exchange Rates: Correcting The Errors," The Review of Economics and Statistics, MIT Press, vol. 79(3), pages 353-361, August.
    17. Campbell, John Y. & Clarida, Richard H., 1987. "The term structure of euromarket interest rates : An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 19(1), pages 25-44, January.
    18. Nihar Shah, 2022. "Doubly heterogeneous monetary spillovers," International Finance, Wiley Blackwell, vol. 25(2), pages 126-150, August.
    19. Zura Kakushadze & Willie Yu, 2019. "iCurrency?," Papers 1911.01272, arXiv.org, revised Nov 2019.
    20. Jianfeng Yu, 2011. "A sentiment-based explanation of the forward premium puzzle," Globalization Institute Working Papers 90, Federal Reserve Bank of Dallas.

    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • P20 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpif:0502008. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: EconWPA (email available below). General contact details of provider: https://econwpa.ub.uni-muenchen.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.