Spot and forward exchange rates and the risk premium in forward exchange : Tests using Finnish data

This paper analyzes empirically the relationship between spot and forward FIM/USD exchange rates during 1974-1984. In particular, it is studied (1) how good predictors of future spot rates forward rates are, (2) whether or not there is a risk premium in forward exchange, and if so (3) how the risk premium can be decomposed into the real interest rate differential, the expected deviation from purchasing power parity, and the deviation from covered interest parity.