For me, anything with an Forward Rate Agreement (FRA) and Triangular Currency Arbitrage is getting Christmas tree-ed. Oh, and the entire Quant section. Yikes. If anyone has an easy way to understand FRAs or Triangular Currency crap, would love to hear it.
i had absolutely no clue how to approach the three way arbitrage, i didnt think ill ever understand it. then i saw the schweser vids on that topic, they helped me slam a nail into the head of three way arbitrage, and covered interest rate arbitrage. FRA however is a different story.
Triangular currency arbitrage was made easy when i realised i always had to convert one currency to another at the worst of the bid / ask rates. Always take the exchange rate that leaves you worse of in the exchanged currency. I also just start with 1$ (or whatever currency) of the starting currency and then get to the third currency and convert back. if it is not 1$ (or is outside the spread) then there is an arbitrage opportunity. FRAs was made easiest for me by my boss explaining them as two people agreeing to make two differetn sets of payments. One fixed and the other floating for example. Simply value each side of the equation using the yield curve given x days after initation and then bring the value back to current dollars and then net out to see who won. Buying an FRA is agreeing to pay fixed (they are trying to lock in their interest rate).
Regarding foreign currency, just remember “up the bid, down the ask.” Set up the relationships as A/B and if you are going from A to B then use the ask price, and from B to A use the bid.
billy22g, The basic approach in dealing with triangular arb is what OnToTheNextOne said. Here is the link with some examples I wrote. It’s very easy to use in practice. http://www.analystforum.com/phorums/read.php?12,1254568,1254824#msg-1254824
Triangular approach did it for me…
Remember this and you are done : Put the currency where you are starting in the denominator , convert all quotes that are given to you to be look that (migh involve 1/x’ing one pair of quotes) and then use the bid rate for everything. Forget about ask.
For the triangular arbitrage, just simulate the scenario. Just know that if you want to buy a currency, use the MORE EXPENSIVE RATE, if you want to sell a currency, use the LESS EXPENSIVE RATE. Just like in the money changer, don’t be confused. Then try 2 different scenario until you figure out a profit. For example, USD to EUR to JPY to USD. If it’s not working, try the other way around, USD to JPY to EUR to USD.
FRA is relatively simple. For example, if you want to find the rate for 2x3 FRA, then u need a 150 days rate and 60 days rate. 2x3 means 90 days rate, initiated after 60 days. To find the 90 days rate, just divide (1+R150)/(1+R60) = (1+R90). Then u get the 90 days FRA rate, just convert it to annualized rate. To find the value of FRA, u have to know the FRA rate, and the spot rate. Remember that the payment is settled at the end of the period (for example, after 90 days). Then u know the interest rate differential, find the present value of it.
zero Wrote: ------------------------------------------------------- > Triangular currency arbitrage was made easy when i > realised i always had to convert one currency to > another at the worst of the bid / ask rates. > > Always take the exchange rate that leaves you > worse of in the exchanged currency. > > I also just start with 1$ (or whatever currency) > of the starting currency and then get to the third > currency and convert back. if it is not 1$ (or is > outside the spread) then there is an arbitrage > opportunity. > > FRAs was made easiest for me by my boss explaining > them as two people agreeing to make two differetn > sets of payments. One fixed and the other floating > for example. Simply value each side of the > equation using the yield curve given x days after > initation and then bring the value back to current > dollars and then net out to see who won. Buying an > FRA is agreeing to pay fixed (they are trying to > lock in their interest rate). +1 Thanks for the triangular arbitrage help. Converting at the “worst rate” makes it so much easier to understand.
Only thing I’ve completely left behind is emerging markets equity. I hate it and want it to die.
Venture Capital Valuation Time Series I’ve got too little room in my memory to try to jam in any more useless formulas.
FYI: didn’t mean to offend anyone with this. just finding ways to make studying a bit more fun lol emerging mkts equity is that crap when u gotta adjust nominal and real cash flows right?? or is that whole decomposition of rfr, cost of debt, blah blah … that stuff is ridic … i remember it with some disturbing ways risk free rate …no matter where u are in the world, only America matters… thats why u use the US risk free rate…but when ur not in america u miss it, so you adjust the inflation differential to reduce getting sick of emerging country inflation … so risk free rate = US risk free rate + inflation differential for cost of debt…imagine u are in debt to some gangsta in the US, but you are in your local country…so your taking local risk BUT if u dont pay up the gangsta in the US is gonna make u spread ur cheeks … so cost of debt = local risk free rate + spread on comparable US debt Beta and ERP are straightforward. emerging markets are too stupid to be trusted, so always rely on the global industry average and risk premium… these aren’t my best memory tricks, probably cause im too tired to give a sh!t anymore. but maybe it will help! oh and for macro multifactor models vs fundamental factor models…for macro, just think to yourself “what a SURPRISE! i dont give two sh!ts about this. no wonder the factors have to be surprises to keep people interested” … and you can’t ignore fundamentals, cause without em stock prices wouldnt mean anything…so thats why the fundamental factor model measures the fundamental characteristics of a stock …
haha all your ways of remembering it seems to be working…nicely done