New model accurately predicts currency risk, solving forward premium puzzle.
The article presents a new way to figure out currency risk premia by looking at interest rate differences. By using a special model that considers how interest rates change over time and includes unpredictable factors, the researchers were able to calculate the risk premia for different currencies. The results show that these estimated risk premia can help explain why forward exchange rates sometimes don't match up with actual rates, and they have some interesting characteristics worth exploring.