Hello, I am very confused. THe formulas for the pricing of a forward currency are different in Econ and Derivatives: In Econ it says:
Forward = Spot * (1+iFC)/(1+iDC)
In derivatives it says:
Forward = Spot * (1+iDC)/(1+iFC) Can someone explain please?
I would bet that in econ spot is defined as FC/DC and in derivatives, spot is defined as DC/FC.
Gotta be.
Hi, Yeah you are right. THanks for your answer. Dont you think this is a little silly? Why not keep some consistency?
Different authors for different topics.
I agree: consistency would be nice.
Sigh.
It definitely is.
I like the way that s2000 presents it on his site. (i.e. PC / BC. instead of FC/DC). Keep it consistent and you are good.
I probably shouldn’t betray this, but I just changed it earlier this week; it used to be DC/FC.
(Whew!)
ok guys thanks! But during the exam. They gonna tell us whether the quotes are DC/FC or FC/DC? Can they do one way for Derivatives and the other way for Econ during the exam?
They’re going to tell you that the quote is USD/GBP, or BRL/INR, or CAD/JPY, or whatever.
OK but it does not tell me which one is base currency and price currency. USD/GPB in Econ is PC/BC But in derivatives it is BC/PC How am I supposed to know?
It’s _ always _ PC/BC.
Nobody ever quotes the price of oil in barrels-per-dollar; it’s always dollars-per-barrel.
For USD/GBP, USD is the price currency, GBP is the base currency (the commodity).
OK got it. So I dont understand why the 2 formulas are not different. During the exam: If I am in the econ section of the exam I have to use the ecom formula? If I am in the Derivatives section I have to use the Derivatives formula? Thx a lot
You got it.
My pleasure.
Just take a day off on June 6 Ace.
Thanks for the link to financialexamhelp123.
CFAI never use that notation.
They always say something like “1 GBP buys 1.5 USD” dont worry about the mixed up notation in the books.
Even easier.