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Journal of Economic Integration 1998 December;13(4) :662-672.
International Trade and the Risk Premium in the Currency Forward Market

Bernhard Eckwert Udo Broll 

University of Chemnitz
University of Konstanz
Copyright ©1998 Journal of Economic Integration
In this paper we present an intertemporal model of the spot and forward markets for foreign exchange. We analyze the implications of central bank interventions on the spot market for the risk premium in the currency forward market and discuss the consequences for the allocation of exchange rate risk and for the volume of international trade. As a main result we find that exchange rate volatility does not generate systematic risk and hence does not adversely affect international trade as long as the monetary authorities do not exogenously intervene in the foreign exchange spot market. (JEL Classification: F11, F31, F33)
1. Broll, U., Wahl J. E., and Zilcha, I. [1995], "Indirect Hedging of Exchange Rate Risk," Journal of International Money and Finance 14; pp. 667-678.
2. Hodrick, R. J. [1987], The Empirical Evidence on the Efficiency of Forward and Futures Foreign Exchange Markets, New York: Harwood Academic Publishers.
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