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CFAI Reading 48 page 58: question 15

Why do they divide the Y123.15 by (1.045)^90/365

and why divide the 1/(1.045)^90/365 ???

Can anyone help with this please?

This would be a super-lengthy explanation for anyone, so you should explore the concept in example 5 on page 40 first. Problem 15 is basically the opposite trade. In example 5, the forward is overpriced so you short it. In problem 15, the forward is underpriced, so you buy it. The currency quote is flipped so that you can work out the numbers required to short the yen.

anyone else help with this?

I don’t have the curriculum, so I’m flying blind here. If you can give some more info (without violating CFA Institute’s copyright), I’ll be happy to give it a shot.

They do this to make sure that they have 1 USD in 90 days after being invested at 4.5% annual rate. You could get to the same result if you don’t do it: Buy 1 USD at the current spot rate of 123.15, invest the 1 USD at 4.5% and take the proceeds of 1.111 to buy Yen at the previously locked in forward price of 123 per USD to obtain 124.36 yen. Your yen return over the 90 day holding period = (124.36/123.15) -1 to get to the same result.

Thanks very much…i was waiting a long time for somone to answer this for me.

wait, so are we not allowed to quote the CFAI text? Seriously?

I don’t think the CFAI would have a problem with quoting as long as we’re helping each other. I remember that from L1 Ethics. If this was indeed an issue, AF, as we know it, would cease to exist.