good catch Dreary I made a note to come back to this formular on my first pass through CFA text and never did. Thanks for the reminder. I don’t think Schweser covers that, might show up on the exam.
deleted
The best trick for that is just to remember to have the rates set up so you get the worst possible result if you’re looking to buy or sell (aka widest spread).
my way of remembering is that whenever you are multiplying, u multiply directly to corresponding bid or ask rate. whenever u r dividing, u do the cross.
i apply up the bid down the ask to both FX rates and interest rates… seems like universal rule.
Whats the meaning of up the bid down the ask… is it just you buy to the ask, sell to the bid ?
This is just the way I remember this formular, works for bid only. You need to calculate bid of the forward spread you start with :Y spot bid (up the bid means goes to numerator) multiply by Y interest rate bid (up the bid) and divide by interest rate ask(down the ask). Formular is basically interest rate parity, the rule just helps to remember where to use bids and asks. For ask calculation you should not use this rule. just remember to use asks where you used bids and use bid where you used ask in bid calculation above.
Funny how exam is in 2-3 days and most of us are confused over the answers…
passme Wrote: ------------------------------------------------------- > my way of remembering is that whenever you are > multiplying, u multiply directly to corresponding > bid or ask rate. > whenever u r dividing, u do the cross. ^^^^^ I agree this is the best way to remember.
BID --> 108.10 * [1 + .0125(90/360) / 1 + .0525(90/360)] = 107.033 why are you using .0525 and now .05? This part is still baffling me.
because you are borrowing $, you pay the ask interest rate.