Kumar, Aakash (2026) A perspective to Uncovered Interest Rate Parity (UIP): FX Forward Contracts as a tool to hedge long-run currency risk. Masters thesis, Concordia University.
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Abstract
This work investigates whether foreign exchange (FX) forward contracts offer an effective hedge for long-run currency risk, defined as the cumulative horizon over which short-run deviations dissipate, constructed by systematically rolling 3-month and 6-month forward contracts, considering the constant empirical failures of Uncovered Interest Rate Parity (UIP) at short horizons. Drawing on a chronological literature review of the UIP and International Fisher Effect (IFE), it traces how early short-term rejections, post-crisis regime shifts, and recent methodological advances, particularly Durbin regressions, have reshaped my understanding of the link between interest differentials and expected exchange rate movements. Using 3-month / 6-month forward data and econometric techniques that explicitly address overlapping observations and autocorrelation, the study reassesses whether UIP holds over slightly longer horizons when currency exposure is hedged through systematically rolled FX forward contracts. The study evaluates the extent to which long-run UIP validity restores the theoretical equivalence between hedged and unhedged positions, and identifies conditions under which risk premia, structural breaks, and low-interest-rate environments continue to generate meaningful deviations. Taken together, the findings provide an updated perspective on the long-run viability of FX forwards as a hedging instrument, clarifying when they deliver unbiased protection against currency risk and when they may embed systematic costs or lost opportunities for international investors.
| Divisions: | Concordia University > John Molson School of Business > Finance |
|---|---|
| Item Type: | Thesis (Masters) |
| Authors: | Kumar, Aakash |
| Institution: | Concordia University |
| Degree Name: | M. Sc. |
| Program: | Finance |
| Date: | March 2026 |
| Thesis Supervisor(s): | Kim, Kun Ho |
| Keywords: | Uncovered interest rate parity, international finance, FX Forwards, derivatives, and Durbin regression. |
| ID Code: | 997090 |
| Deposited By: | Aakash Kumar |
| Deposited On: | 29 Jun 2026 15:16 |
| Last Modified: | 29 Jun 2026 15:16 |
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