question 18 of 09 sample v1. the document gives 1yr RFR US = 1.3%, RFR AU = 4.6% at the same time gives sport rate = 0.69 USD/AUD, and one year forward rate = 0.67 USD/AUD. how to calculate currency premium / discount then as these two dont agree with each other! using RFR, forward discount = 4.6% - 1.3% = 3.3% using rates, forward discount = (0.69 - 0.67)/0.69 = 2.9% which one should be used and why please?
anyone can contribute his view on this plz? it is a critical question from CFAI sample!
If Interest Rate Parity held, these should be the same, however, as they are not, you can decide to hedge or not based on the variance. If you hedge by buying the forward, you’ll lock in a 2.9% return but if you don’t hedge, you’ll get the 3.3% difference in the risk free rates. So you shouldn’t hedge. Hope this is right.
use the forward rate since IRP hold so use formula Rh=Rl+f where f=F-S0/S0 instead of Rh=id+(RL-if) if both are given and not giving the same result for forward p or discount.
thanks for the explanation guys. Doubledip, I thought using (LC RFR - FC RFR) is a derived form of IRP as well? just to calculate forward discount / premium. Or this is a form of “expected” rather than “forward”? bottom line: using the given forward rate is a safe input for the calculate “hedged” scenario