CFA Mock confusing question

CFA Level I
#1

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Can someone please tell me how to do this? Thanks

#2

BUMP

#3

Here are the steps:

  • Borrow BRL500,000 @ 4.1% interest
  • Convert BRL500,000 to AUD @ BRL/AUD 2.1128; you get AUD236,653
  • Invest AUD236,653 @ 3.1% for one year; you end up with AUD243,989
  • ConvertAUD243,989 to BRL @ BRL/AUD 2.1388; you get BRL521,844
  • Pay off loan of BRL520,500; you’re left with BRL1,344

There’s your profit: BRL1,344.

#4

i dont get the last part.

  • ConvertAUD243,989 to BRL @ BRL/AUD 2.1388; you get BRL521,844

its in AUD, dont you have to mulpity it by 1/2.388 to get it to AUD/BRL

#5

The spot rate BRL/AUD 2.1128 means BRL2.1128 = AUD1; you divide BRL500,000 by 2.1128 to get AUD236,653.

The forward rate BRL/AUD 2.1388 means BRL2.1388 = AUD1; you multiply AUD243,989 by 2.1388 to get BRL521,844.

You are correct that the forward rate would also be AUD/BRL 0.4676 (= 1/2.1388). If you divide AUD243,989 by 0.4676, you still get BRL521,844.

#6

so its 243,989 aud/brl * 2.1388 brl/aud and it will become 521,844 brl/aud ? sorry if im not making any sense

#7

No, it’s AUD243,989 × BRL2.1388/AUD1 = BRL521,844.

The 243,989 is Aussie dollars, not Aussie dollars per Brazilian real; the 521,844 is Brazilian real, not Brazilian real per Aussie dollar.

#8

OOOO now i get it! i always assume that if they just said aud243 it means 243aud/brl when you are comparing the two. thank you so much for clearing it out

#9

My pleasure.

#10

The explanation by CFAI mock is kinda confusing to me, especially the formula (how much I hate formulas!) ?I think it this simple way:

  1. I borrow BRL 500,000 with the interest rate is 4.1%. Next year, I will have to pay back BRL 500,000 x (1+0.041) = BRL 520,500 (the principal and interests)

  2. To make profit, I have to do something get more than the interest of BRL 20,500. So, I convert it to AUD: BRL 500,000/2.1128 = AUD 236,652

  3. I put the above converted money in a bank to earn interest in AUD. At the end I will get back the principal and interest in total : AUD 236,652 (1+ 0.031) = AUD 243,989

  4. I convert (3) back to BRL by multiply it with the forward rate: AUD 243,989 x 2.1388 = BRL 521,843.7

  5. I have profit: BRL 521,843.7 - 520,500 = 1343.7

#11

Exactly!

#12

Do not confuse with the CFA mock exams they are really tuff than actual exam, Do not think about it that much.