Abstract
This paper explores the relationship between currency futures and realized spot rates for the Indian rupee US dollar exchange rate. Using futures contracts with maturities of one, two and three months, we examine the unbiasedness of futures quotes as a predictor of the spot exchange rate as well as the nature of time-varying risk premiums in this emerging market. Empirical estimates, obtained using monthly data, suggest that there is a significant time-varying risk premium in the considered futures market. We also find that the premium is of greater magnitude and more significant with increasing maturity of the futures contracts. We also examine the relationship between realized risk premiums and explanatory variables such as the spot rate, basis and realized volatility, skewness and kurtosis of the spot exchange rate. Our results show that the level of the spot rate as well as its realized volatility can be considered as significant determinants of realized risk premiums in the considered futures market.
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