What is forward premium puzzle?
The forward premium anomaly in currency markets (also referred to as the forward premium puzzle or the Fama puzzle) refers to the well documented empirical finding that the domestic currency appreciates when domestic nominal interest rates exceed foreign interest rates..
What does forward rate mean?
A forward rate is the settlement price of a transaction that will not take place until a predetermined date; it is forward-looking. In bond markets, the forward rate refers to the effective yield on a bond, commonly U.S. Treasury bills, and is calculated based on the relationship between interest rates and maturities.
What is forward premium and discount?
If the forward exchange rate for a currency is more than the spot rate, a premium exists for that currency. A discount happens when the forward exchange rate is less than the spot rate. A negative premium is equivalent to a discount.
How do you interpret forward rates?
The forward exchange rates are quoted in terms of points. For example, let’s say the current EUR/USD exchange rate is 1.2823. The forward quote for a 90-day forward exchange rate is +16 points. This 16 points will be interpreted as 16*1/10,000 = 0.0016 above the spot rate.
What is forward exchange rate with example?
Suppose, for example, that a Canadian firm buys $100,000 worth of computer equipment from Japan, and is given 90 days to pay. At the time the selling price is agreed upon the rate of exchange of the yen for the dollar is, let us say, 360 yen equals one Canadian dollar.