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Zero Arbitrage profit equation

(1+ id)= Sf/d (1+ if) (1/ Ff/d)

Hi,

In the above equation, the domestic/foreign interest rate, are they annual rate?

I saw a question using 90 days interest in the formula. (180 days interest divided by 2)

Help please!

Thank you.

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It depends on the rate that is quoted. When calcuating using this equation, pay special attention to the time frame referenced. The 90-day forward rate using 360-day LIBOR would be based on 90/360 of the quoted LIBOR plus 1.

If you have a 90-day forward exchange rate, then you use 90-day interest rates; if you have a 360-day forward exchange rate, then you use 360-day interest rates.  And so on.

As FratBoy mentioned, the rates will be quoted as annual rates; you need to change them to effective rates for the period in question.

Finally, remember that LIBOR rates are nominal rates, not effective rates.

Here are a couple of articles that I wrote that may help:

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

Thank you guys!

My pleasure.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/