# PM differences that I don't get

This is driving me nuts. (From CFAI question, SS 68 Question 7) This is regarding investing in another country and calculating Domestic Return. If a UK investor purchases a US bond at the beginning of the year. At that time the exchange rates is .69 Pounds/. At the end of the year the exchange rates is .67 Pounds/\$ The US interest rate is 1.76%. What is the gain in % terms to the British Investor? The formula that I use is Foreign Interest rate + Nominal Currency Appreciation. My calculation is .0176 - .029 = - 1.14% Unfortunately that isn’t correct in CFAI terms and I can’t locate the formula that they use as a guide to the answer. Their calculation is (1+.0176) * (1 - .029) -1 = -1.19% Any clue what the hell I’m missing?

you are trying to do the approximation method - which is currency appreciation - change in interest rate. they are doing the (1+currency appreciation)(1+interest rate). (1+s)(1+r) = 1+r+s+rs and then they ignore the r*s term because both numbers are usually small. in this case - the r*s term is significant.

Once again thank you cpk. Was this forumula even in the text though? I can’t find it anywhere?

it is often discussed thro’ most of econ as well as elsewhere - and then they put the approximately equal symbol (the two squiggly signs together) to indicate that.

YES GMofDEN is BACK ON BOARD. this only furthers my enthusiasm for this test. GM- hope all is well and welcome back.

Gracias Bannis. I’ve been at it pretty hard for awhile but haven’t been on AF. I’m at the point now where I’m running into crap like this up above and am wasting time trying to figure it out. Thankfully bad @sses like you and cpk help out a ton. How’s your stuff going? You hit any of the practice exams yet? I’m 14 days away from hitting my first big practice tests. 30 days should hopefully be plenty. Paying a lot of attention to the smaller SS’s this go around.

all i did so far was the free sample on the CFAI site, got a 73%. might do a schweser one this weekend or maybe half of one and some more CFAI q’s for review. i am focusing on all topics and hopefully can get over the hump this time around. good luck and glad to have you back. tonight going to do some CFAI q’s on corp fi. ready, set, go time.

I’m sure you’ve got it this time Bannis. You’ve been byaaatch slapping this curriculum around for awhile now. We’ll have a better test day this year knowing what to expect a little better. Spending a LOT more time this year with the CFA Q’s. A lot of similarities to quite a few of the vignettes we had last year. I’ll send you an email later. Gotta get some exercise.