Charater Of Term Stucture Of Forward Exchange Rate Volatility

The huge turnover volume of foreign exchange derivatives and the fact that the turnover volume of foreign exchange has largely exceeded the fundamental international trade demand, all of which are calling people's attention to the big demand of investment, speculation and risk management trade of foreign exchange rates. Under the floating exchange rate system, currency prices keep changing all the time, which make the foreign exchange market very risky, but this make up the demand of the study on the volatility character of foreign exchange rate.Foreign exchange rate volatility has been researched thoroughly, but the relationship between the volatility and the maturity of foreign exchange rate has not been taken much attention on.When the target interest rate rises, the spot rate will rise, but at the same time, according to the interest rate parity theory, the long term forward exchange rate will decline. So this condition make the existence of a point or a range possible, at or within which, the forward exchange rate of the same maturity do not be affected by interest rate change or nearly so. This is the target of the thesis. Within the economical system, in which various economical variables affect and being affected by each other, if a relatively steady reference point can be found, the modeling precision of price movement law will be promoted.The thesis means to figure out the volatility reaction extent of different maturity forward exchange rate to target interest rate change. Various foreign exchange rates will be checked.The paper first makes a comp analysis of the statistical features in the log return of forward exchange rate with different maturities and found out the co-movement trend between volatility and maturities in all exchange rates. Low volatility concentrates on certain maturities such as 3 months, 6 months, 15months and 21 months. In the following parts, this paper studies the difference reflected in the exchange rate term structure after interest rate adjustments, with a reference to the change in the corresponding interest rate term structure. Results show that when interest adjustments lead to parallel shift in the term structure, the term structure of foreign exchange rate before and after the event will have a cross. In addition, the paper established (G)ARCH model to analyze forward exchange rate volatility with different maturities. By adding a dummy variable to reflect the adjustment in interest rate in the (G)ARCH model, we can arrive at the impact of interest rate change on the broader economy by estimating the parameter before the dummy variable and test the response of different forward exchange rate volatility to interest rate change, with an effort to draw a term structure of foreign exchange rate volatility and the forward exchange rate product with minimal volatility.After modeling 4 main exchange rates, we concluded that, the maturity range from 1 year and 2 year of USD/CAD forward exchange rate reacts less than other maturities to target interest rate change. And the range from 2 year to 4 year of GBP/USD, the range between 18month to 3year of NZD/USD, the range from 2 year to 3 year of AUD/USD are the accordingly forward exchange rate maturity range that react less to target interest rate change. The maturities that have the least volatility reaction to interest rate change are 18 month, 30 month and 2 year. General speaking, when target interest rate change, the maturity range with relatively less volatility are between 1year and 3 year.In order to get more precise results, the expected interest rate were deprived and the parameters were estimated again with the unexpected interest rate data. The conclusion is that after the deprivation, 3 year maturity forward exchange rate of NZD/USD has the least volatility, and the 30 month maturity of AUD/USD. The volatility of forward exchange rate of the two currency rate tended to rise when maturities get long.