# Domestic Currency Return

Formula: Rdc = Rfc + %change in Spot Understood. The return does not match up if you try to convert your . Example: US investor invests in UK bond Exchange rate at t0: 1.5 /L bond returns 12% Exchange rate at t1: 1.6 OK, now if you use the formula, the answer is 18.67% (considerred correct). Why is it wrong if we calculate it the following way: convert \$ to pound, invest it, and the convert back. The answer is 19.46% if it is done in this manner. It is considerred wrong, why?

anybody?

I get 19.46%.

Rdc = Rfc + %change in Spot is a linear approximation of: Rdc = Rfc * S1/S0

That makes sense.

budfox427 Wrote: ------------------------------------------------------- > I get 19.46%. Close, I get 19.47%. (1+12%)*1.6/1.5-1

“check out the big brain on maratikus” lol

budfox427 Wrote: ------------------------------------------------------- > “check out the big brain on maratikus” what do you mean? i wasn’t trying to offend you.

Sorry, I was joking with you. I thought you were ribbing me because I didn’t round up. Not offended at all. Sometimes the internet sucks.

So we’re saying that whole 0.8% came from the effects of the approximation? Something to keep in mind on exam day for those of us who prefer not to approximate our calculations.

the correct answer on an unnamed provider was the 18.67%

That’s what I’m saying, there’s a 0.8% gap between the results of the linear approximation formula and the exact formula. That’s the largest I’ve seen the gap.

our answer is more accurate than theirs

I know, but I’ve also seen some CFAI questions that ask for the answer using the approximation and typically I’ve always just used the multiplied formula and been fine, but .8% could potentially mess you up in a multiple choice exam. I guess I’m just saying its scary and to keep an eye out in case they specify one version or the other.