Currency Returns - Rdc Rfc & Rfx Reading 28

CFA Level III
#1

Volume 5 page 223 dont you think its an error? In the formula below the box, it seems they have mixed up Rfc with Rfx. I found so many errors on this chapter…it’s so hard to follow it!! Anyone feels the same? Wish where would be a simple explanation to all this…

#2

Also on the same note currency roll yield on page 257 question - answer is completely incomprehensible. Has anyone worked out this one? It should be negative roll yield…

#3

ill be working on solving the questions in a while; ill reply once i get to the question you’ve mentioned.

#4

Also page 253 why they are using mid point in Hedge #1 and not spot like in Hedge #2… Reading 28 is the hardest for me…

#5

I’m more confused about which formula to use:

  1. (1+Rlc)(1+Rfx) -1

  2. Rlc+Rfx- Rlc*Rfx

I have seen these formulas in different exams-mocks. Can anybody clear it for me?

Reading 28 is the worst for me. It has so many sub-topics and each one has testable material.Which ones are important from testing point - any ideas fellow suferers?

#6

I seen all examples being tested even the one on the page 274 with a regression line…literally there are 9 examples and all are examinable you can easily get whole set on this. They also strongly word GBP/USD you are selling GBP hence buying USD at offer price…it could have been so much easier.

#7

I expected formula #2 to be Rlc + Rfx + Rlc*Rfx: if I expand out #1, I should end up with #2.

Formula #1 is more intuitive for me. The investment grows to 1+ Rlc in the foreign currency. When I convert this accumulated amount back to my currency, I get an extra source of gain or loss, depending on how the exchange rate changed, as reflected by Rfx.

#8

If anyone could explain when to use mid quote and when not I get when to use bid offer but not mid point does this depend if it is a forward or spot? Discount or premium?

#9

breadmaker,

THanks alot for making it more clear. I have a problem with finding risk for the portfolio also. Could you explain it to me in simple words like you did for the fromula above please?

#10

for roll yield, you have to determine what currency you are long at.

Lets say you are long jpy / usd example 110. You get the forward rate based on the spot + points / 10,000 and lets say the answer is 108.

Since you are long in jpy, you need to sell jpy (ie buy usd). since jpy appreciated, it means you are selling high (what appreciated), and buying low … when you sell high and buy low it means + roll yield

if forward is 112.

since you are long in jpy, you need to sell jpy (ie buy usd), if you sell jpy, you are selling low and buying high; this is negative roll yield.

So make sure to determine your position first (long/short), then calculate the forward (dont compare to expected spot), and then decide.

#11

If you had a specific question within the area of finding risk, I could give it some thought and get back to you. I’m part of the generation that used the “Currency Risk Management” note by Solnik & McLeavey, so I’m probably not going to be instantly familiar with any newer concepts/approaches.

#12

Bilal,

I want to ask you more about this roll yield stuff. This must be t6he worst reqading ever. Feeling good with other parts of the course but roll yield is rubbish.

So If I am long JPY at an all in rate of 110 and the JPY appreciates then roll yield is positive, since I am using less USD to buy an in the forward market than in the spot market.

Please comment

#13

if you are long in jpy and it appreciates:

-to hudge you need to sell jpy and effectively buying other side lets say usd.

jpy appreciated and you are hedging by selling it, so you are selling high and buying (usd) low which means a +roll yield.

if jpy depreciated and you are long, to hedge, you need to sell jpy, so you sell the jpy (which depreciated), which means you sold low and bought high (other curreny) = > negative roll yield

now to determine appreciation and depreciation, make sure you calculate the forward and NOT look at expected spot. Calculate the forward rate by spot ± bps / 10,000 then you decide if it appreciated or depreciated.