Can some please explain me why in question 82 is calculated with different formula Isnt the formula be S0 * (1 + R dc)^t / (1 + R fc)^t to find forward rate in case of arbitrage. Domestic currency comes in Numerator and Foreign in Deno thanks
page ? book ?
Book 7, page48 and Q 82
sorry do not posses schweser… need to find it first in the cfai books…
anyone?
What does the book state? I do not have it now…
it is domestic in numerator and foreign in denominator. GBP is Domestic, EUR is foreign. F = S (1+rd)/(1+rf) ^ 244/365 = .6892 (1.0417)/(1.0328) ^ 244/365 = .6932
How come GBP is domestic? Company has headquarter in Germany hence Euro.
Just look at the spot exchange rate. It is quoted as GBP/EUR. Going by that we can take GBP to be domestic. If we consider the EUR to be domestic we will have to take the inverse of the given spot. We will get the same answer
There is a great way to set these problems up where you never have to know DC/FC or FC/DC rule. Basically start by showing the exhange rate as a fraction at the top center of the page and work down each side indepently and then divide at the end. Works with interest rates, inflation rates, etc. Just remember to pay attention if it is 1 year, fraction of year or multiple years. Hopefully this shows up ok: ____________________GBP .6892 / 1 Euro_________________________ Left 1.0417^(244/365) * .6892________Right side 1.0328^(244/365) * 1 ________________GBP .7083 / 1.0218 Euro________________________ _____________now divide .7083 GBP / 1.0218 Euro to get .6932 GBP/EUR
thank you guys.
That was the single most valuable tip I got out of the 3 day Schweser review I took. The instructor tought us that structure and worked all the problems that way…I’ve since thrown out about 6 notecards with all those DC/FC rules!
Sponge_Bob, in what city did you take the 3d? Do you by any chance remember the name of the instructor?
Sponge_Bob_CFA Wrote: ------------------------------------------------------- > That was the single most valuable tip I got out of > the 3 day Schweser review I took. The instructor > tought us that structure and worked all the > problems that way…I’ve since thrown out about 6 > notecards with all those DC/FC rules! really helpful. never seen it done that way. thanks. i owe you a beer if I pass because I suck at forex.
Took it in Boston and the instructor was Susan Lakatos (sp?), the best thing I got out of the whole course was that forex structure.