Abstract
Recent research on forward foreign exchange rates as predictors of future spot exchange rates has concluded that forward exchange rates contain two expectational components, both which are time varying. This study extends prior research on the expected premium component of foreign exchange rates by empirically testing the set of international parity relationships for nine countries under a structure imposed by two different models for forecasting future inflation rates. The empirical tests confirm that most of the variation in forward rates is variation in premiums. More importantly, the results indicate that differences in the level of expected real interest rates between the U.S. and some countries over the study period can explain the size of the expected forward premiums.