breakeven analysis

when comparing yield of a foreign bond to domestic bond while doing a breakeven analysis, do we add/subtract the forward premium/discount from the yields or not???

no. cfai made it very clear.

Did you see the one example in CFAI where they also gave you the CASH RATES and you had to use that as part of the question in answering the breakeven spread change? It was in one of the mock exams.

PJ what are you talking about? you didnt have to use cash rates, atelast i dont think so. It was sample #3

According to the solution I saw, you did factor the cash rates. I’m using the 2007 Level 3 Mock Exams… so take it with a grain of a salt.

Where did you get 2007 level 3 mock exams!?!?

Trust me… they aren’t worth taking… a few things in there that no longer apply to us (STatistical Questions involving Natural Log) and a few others. But the cash rate mixed with break-even spread was in there.

the CFAI text clearly mentions that breakeven analysis does not take into account the currency risk

Sorry, where can i find this in the text?

this is also there in one of the schweser vol 2 ques. at one place they adjust for currency … another they don’t. i guess i’ll calc both and hope that not both are part of the options.

I’ve just done CFAI sample 3, and there was a clearly a cash rate differential quoted but this was NOT considered in the answer. They looked purely at the difference in nominal yields. Tricky one with this on was that the duration used was that of the domestic country which was not the country with the higher yields (this scenario didn’t occur in any previous examples I saw)- guess you need to always remember to used the higher duration whichever country it relates to.