oh how i forget the most simple of formulas when the question comes up. Go time, do you remember this simple formula or not: A Korean investor’s domestic risk-free rate is 3%. The Japanese risk-free rate is 2%. The investor expects that the Korean currency (won) will depreciate by 4% over the next year. What is the foreign currency risk premium (FCRP)?
FCRP = Currency Appreciation - (RDC-RFC) DC=Won, FC=Japan So FCRP=4-(3-2) = 3%
yep. you remembered the formula. i couldn’t remember if it was domestic or foreign currency appreciation and flipped them. whoops.
annddddd a swing and a miss for me on my 1st tax q of the evening: In a tax-exempt account, contributions to the account are made with: A) after-tax funds and reduce the investor’s current tax bill. B) after-tax funds and do not reduce the investor’s current tax bill. C) pre-tax funds and reduce the investor’s current tax bill.
B) after-tax funds and do not reduce the investor’s current tax bill.
B? The fixed-rate on a semiannual 2-year interest rate swap is closest to the: A) current 180-day T-bill rate. B) coupon rate on a 2-year par bond with the same credit risk as the fixed-rate payer. C) coupon rate on a 2-year par bond with the same credit risk as the reference rate.
C) coupon rate on a 2-year par bond with the same credit risk as the reference rate
Correct - what’s the reasoning? I did a B on this
you guys are well ahead of me on PM. i need to learn my tax regimes, blah. Your answer: C was incorrect. The correct answer was B) after-tax funds and do not reduce the investor’s current tax bill. The tax benefit for a tax-exempt account occurs when the funds are withdrawn
LIBOR rates or EURIBOR rates is what is used on Swaps. So the credit risk would be that of the reference rate. The Fixed rate payer is buying a bond - because he is receiving floating payments - which is the coupon rate on the floating rate bond-- his credit risk has nothing to do with that of the swap.
Current and potential credit risk in a swap are: A) equal at all times over the term of a swap. B) not equal at the inception of the swap. C) greatest between payment dates
B) not equal at the inception of the swap.
the wording on this seems weird to me. at inception i’d think current credit risk would be zero but that could potentially increase, so maybe it’s B.
B
B is Correct.
the credit risk is zero at inception, and i guess the potential is theoretically infinite at inception so B
you guys are kicking butt … I’m starting to get worried. wish I could spit this sh!t out like you do. I’ve got 2 SS to go and then will be full review mode … although I’ve been trying to review while also moving fwd for the past two weeks. Need to stay motivated and focused.
Need to re-read swaps. I keep flip floping the tail portion of the FCRP calculation - 5% -3% ? gross. The best part of the CFA is that both answers would surely be available on the test.
cpk123 Wrote: ------------------------------------------------------- > FCRP = Currency Appreciation - (RDC-RFC) > > DC=Won, FC=Japan > So FCRP=4-(3-2) = 3% I messed up on this. Are we taking currency appreciation of Japanese currency? I had it as =-4-(3-2)
^ Since WON (domestic) depreciated, JPY appreciated (foreign) Foreign Currency Appreciation is therefore = 4%