Can someone please clarify…if we should use to the power ^ or divide incase of forwards on currencies… Based on Economic (Schwezer, Page 319) it is add-on : Example: US Annualized interest rate 9%, Euro Annualzied interest rate 12%. Spot rate 1.30/Euro. Calculate 3month forward rate.... Ans: 1.2875 /Euro. Based on Derivatice - Currency forwards( Schwezer, Page 27) it is compunded : Example: Risk free rate in US 6%, in Mexico 8%. Spot rate 0.0845/mxn. calculate 180day forward contact. Ans: 0.0837 /Mxn. I have not looked at CFAI texts:…
I’ve always exponentially compounded these: fwd = 1.3 * [(1+.09)^(3/12)] / [(1+.12)^(3/12)] = 1.2912