This is actually another one of the inconsistencies in the curriculum. If you look at Fixed income they assume the return is Return(bond) + Return Local Currency. In Derivatives it is assumed multiplicative. On the 2004/2005? exam they used addition to find the answer for a weighted bond portfolio.
markCFAIL Wrote: ------------------------------------------------------- > i botched this because i used IRP to determine a > forward rate of 0.6682. I guess in the future the > lesson is that if they give you a forward rate, > don’t calculate it? I guess. Whole problem seems very goofy.
markCFAIL Wrote: ------------------------------------------------------- > i botched this because i used IRP to determine a > forward rate of 0.6682. I guess in the future the > lesson is that if they give you a forward rate, > don’t calculate it? Yes, that is what I got from this thread. IRP dictates what you should get in the forward market. Forward rates are what you can get in the forward market.
Absolutely true, Soddy… has to be done by ‘what you are getting’ in the market, than what you should. way to go Bannisja! soddy1979 Wrote: ------------------------------------------------------- > markCFAIL Wrote: > -------------------------------------------------- > ----- > > i botched this because i used IRP to determine > a > > forward rate of 0.6682. I guess in the future > the > > lesson is that if they give you a forward rate, > > don’t calculate it? > > Yes, that is what I got from this thread. > > IRP dictates what you should get in the forward > market. Forward rates are what you can get in the > forward market.
question for everyone: should the US investor hedge the currency risk here?
Remeber this Q. 5.35% vs 5.6%, it’s not a small difference. It seems that the approximation of current effect is only used in fixed income.
My answer is silly looking back.
yes hedge. fwd mkt you can sell at .67 when parity should only be like .668 or so. WINNER!
the star wars youtube was still awesome.
djinn Wrote: ------------------------------------------------------- > question for everyone: should the US investor > hedge the currency risk here? No enough info, IMO. The investor needs an opinion and then decides to hedge or not. But there is an arbitradge opportunity.
^riskless profit beats an opinion any day
Something interesting here… Actually the arbitradge is not very impressive here. Implied forward rate F=0.69*1.013/1.046=0.668, which is close to 0.67. It’s the interest rate diff that makes it look attractive. It won’t work for making $, but it works for us to pass the exam. In the exam, we can use 1) the [market] forward/spot rates if given 2) the implied the rate changes (the interest rate difference).
bannisja Wrote: ------------------------------------------------------- > the star wars youtube was still awesome. I could tell after you wrote your answer it was a trap!
There is a similar type problem in the EOC questions (without the spot forward rates). I get 8.5% less depreciation in currency of 2.9% = 5.6%.