2014 CFA AM - Question 7C

CFA Level III Fixed Income
#1

Hi,

While reviewing some past AM papers I noted that I was confused by the guideline answer provided by the Institute. I understand the question and my justification is correct, but I am unsure why they are dividing the difference between the Domestic RF and Foreign RF rates by 2. The data table already provides the 6 month risk free rate, which is equivalent to our holdings period of 6 months. Therefore, I am unsure as to why the calculation to determine the forward premium/discount (IRP) is then divided by 2.

i.e. (2.5% - 5%)/2 = -1.25%

I would understand why we would divide by 2 if they were given as annual risk-free rates but they are already given as the 6-month risk free rate.

#2

Rates are _ ALWAYS _ in annual format unless otherwise stated

#3

Ugh, it says annualized in parentheses…

#4

I put a square root on each annualized rate. Would that be marked as inccrrect?

#5

I actually did: (1+rate A)^0.5 / (1+rate B)^0.5 which made me be off by 4bps (-1.21% vs. -1.25%)

Can someone remind me when you do what I did and when you just do the simple A-B like in this problem?