Is it just me, or does LII econ seem almost exactly the same as LI last june? That being said, I can’t quite seem to remember how the forward premium/discount calculation works. More specifically, how do you know which is the domestic currency and which one is the foreign currency. (Schweser, page 67) For example, on page 80, question number 12 in the Schweser Econ book, how are you supposed to know if the $ or Sf is the domestic currency? If anyone out there could explain this to me like they were talking to a 5 year old, then I would appreciate it.
repeat after me… domestic over foreign. The question will always tell you (or hint) which is the domestic for the investor - eg where he lives or what currency he starts with or wants at the end, etc. (and yes L2 readings 16 to 19 are the same as L1 last year - happy days!)
Most of the LOS from international economics were moved from L1 to L2 this year, so you lucked out (I guess). Also, I really doesn’t matter if you are the “domestic” or “foreign” investor. The formula is the same regardless; you just use algebra to solve for what the question is asking. For example, say the euro/pound spot rate is 1.3 and the forward rate is 1.5 euro/pound. What is the implied forward premium/discount for the pound? or euro? Pound: (1.5 euro/pound / 1.3 euro/pound) -1 = 15.38% forward premium Euro: ( .66667 pound/euro / 0.76923 pound/euro) -1 = 13.33% forward discount Therefore, we did not have to know which was the domestic or foreign currency; we just had to know what we are solving for.
Schweser page 68 has the answer. The second point: 2. The forward premium or discount is always on the currency in the denominator of the quote (while using direct exchange rates). The question always asks for forward premium or discount on a currency, I beleive this is the clue (that currency should be the denominator). Hope this helps. Regards, Gaurav
Thanks everyone. I appreciate it.
i believe the below example is incorrect - EUR and GBP calculations should be flipped to reflect the fact that GBP is trading at a fwd discount, and EUR at a premium. if todday EURGPB is 1.3, and tomorrow EURGBP is 1.5, it means that it takes 20 more pence to buy one euro tomorrow, hence EUR is at a premium tomorrow. ttouchst Wrote: ------------------------------------------------------- > Most of the LOS from international economics were > moved from L1 to L2 this year, so you lucked out > (I guess). > > Also, I really doesn’t matter if you are the > “domestic” or “foreign” investor. The formula is > the same regardless; you just use algebra to > solve for what the question is asking. > > For example, say the euro/pound spot rate is 1.3 > and the forward rate is 1.5 euro/pound. > > What is the implied forward premium/discount for > the pound? or euro? > > Pound: (1.5 euro/pound / 1.3 euro/pound) > -1 = 15.38% forward premium > > Euro: ( .66667 pound/euro / 0.76923 > pound/euro) -1 = 13.33% forward discount > > Therefore, we did not have to know which was the > domestic or foreign currency; we just had to know > what we are solving for.
kundik1 Wrote: ------------------------------------------------------- > i believe the below example is incorrect - EUR and > GBP calculations should be flipped to reflect the > fact that GBP is trading at a fwd discount, and > EUR at a premium. if todday EURGPB is 1.3, and > tomorrow EURGBP is 1.5, it means that it takes 20 > more pence to buy one euro tomorrow, hence EUR is > at a premium tomorrow. > > Wrong. Your sentence should read… If today is 1.3 EUR/GPB, and tomorrow is 1.5 EUR/GBP, it means that it takes 20 more EUROCENTS to buy one POUND tomorrow. The pound is “more expensive” in the forward market relative to the spot market; therefore, it is selling a a forward premium.
now i can definitely see that you’re wrong - a EURGBP rate of 1.3 means that 1 Euro costs 1.3 pounds. Just like the EURUSD rate of 1.45 (as of right now), means that 1 Euro costs 1.45 US dollars. So the above post from ttoucht is definitely wrong and you should go with my example instead.
Moron, I was trying to be polite at first, but you obviously do not get it. Learn how to read an exchange rate before making a post!
ttouchst is correct. 1.3 EUR/GBP means that one pound is worth 1.3 Euro. The current USD/EUR rate is 1.45. “EURUSD” is another way quoting “USD/EURO”; the CFA curriculum uses the later notation.
gauravku Wrote: ------------------------------------------------------- > Schweser page 68 has the answer. > > The second point: > > 2. The forward premium or discount is always on > the currency in the denominator of the quote > (while using direct exchange rates). > > The question always asks for forward premium or > discount on a currency, I beleive this is the clue > (that currency should be the denominator). > This is right on. thanks. > Hope this helps. > > Regards, > Gaurav
damn I just got to Econ, that is so bomb to know the readings are the same as L1, precious time saved, great!