# breakeven spread analysis: 3 versions

this is what I have seen: a. sample exam of cfa + they have a european bond + they have a us bond + they don´t care about anything else, just one yield minus the other, divided by duration b. schweser exam, volume 2, pm 2 + they have a swiss bond + they have a us bond + they use in the numerator (yield - RFR) for each bond + so they solve for change in int.rates that “eates” yield advantage in terms of yield above RFR c. schweser exam, volume 1, pm 3 + they have a us bond + they have a european bond + they adjust the yield advantage of the eur bond because eur currency is at fwd discount + then they do standard yield advantage divided by duration my point it: when facing bonds in different currencies, what do we have to incorporate? nothing? imlied fwd currency discount/premium? implied advantage of each versus their RFR?.. thx

I t…h…i…n…k…so. I believe BE analysis ignores currency movement.

yea I was very confused by this as well as it does seem schweser decides to do it a couple different ways, but I think it has been said a couple times here that we should be ignoring currency movements, not sure what we shoud be doing with the excess return.

Oh, I see. When given a list of bond and their country’s RFR rate, pick the one with the higest excessive return. (nominal-rfr)

yea but for breakeven do you use excess yields or just the yields?

s23dino Wrote: ------------------------------------------------------- > yea but for breakeven do you use excess yields or > just the yields? if you ignore currency - just yields i believe. Difference in Rfr means nothing excepted for covered interest rate parity

^^ ok so schweser is giving us questions that are useless.

^^ - maybe, but so does CFAI. negative cashflow in GIPS anyone? recieve fixed is a long swap? come on.

i thought pay fixed was long swap

^^-- i thought so too

nobody seems to like my favorite cfa-ism…the use of “dibsursed” instead of “dispersed”…the laugh I got out of that one was worth the \$40 or \$60 or whatever it was…

quote from cfai v4 - p37 “breakeven spread analysis does NOT account for exchange rate risk, but the information it provides can be helpful in assessing the risk in seeking higher yield”. so, we should ignore what schweser did.

page 220, level 2 cfa book, volume 6: (don´t freak out looking for this year books, I am talking a book of last year level 2) “in swaps in which one party receives a floating rate and the other receives a fixed rate, the former is usually said to be long and the latter is said to be short. this usage is in keeping with the fact that parties who go long in other instrument pay a known amount and receive a claim on an unknown amount”

ws Wrote: ------------------------------------------------------- > Oh, I see. When given a list of bond and their > country’s RFR rate, pick the one with the higest > excessive return. (nominal-rfr) I remember this is only for the case that you are going to hedge the currency. It has nothing to do with break-even analysis. BTW, do we have agreement to adjust the yield-difference by the interest difference? I also remember a question from Schweser doing this. But i did not see similar question from CFAI.