An Analysis of the Behavior of the Risk Premium in the German Deutschemark Forward Market: A Comparison of Pre- and Post-German Reunification of 1990 Exchange Rates
The German reunification of 1990 and the methods of economic integration exerted considerable pressure on both the German economy and the deutschemark. This thesis addresses the issue that the reunification undermined the stability of the deutschemark, detectable through a change in the implied risk premium. Emphasis is placed on the forward deutschemark in the context of interest rate parity in order to detect a change in the implied risk premium. By using three month U.S. and German bank Certificate of Deposit rates as the basis for the IRP calculations, a considerable shift in this implied risk premium was detected and attributed to a riskier deutschemark.
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