The spot and 30-day forward exchange rates for the Swiss franc (CHF) are 0.59984 CHF/USD and 0.62734 CHF/USD, respectively. Relative to the USD, the CHF is selling at a forward: A) discount of $0.073. B) differential of 275 points. C) annualized discount of 4.38%. D) premium of $0.073.
I vote D.
I think it is A. 1/0.62734 - 1/0.59985 = -0.073.
I guess it should be premium as Forward is higher than Spot and the quotes are direct (CHF/USD)
It has been a while since I touched currency… A. Spot: $1.66711/1CHF compared to Forward:$1.59403/1CHF. So 1CHF will buy $0.073 less in the future.
And the answer is A.
Oh yea. Oops. **must remember to double check answer on test**
wanderingcfa Wrote: ------------------------------------------------------- > Oh yea. Oops. > > **must remember to double check answer on test** I always like to think I’ll be more careful somehow when I take the real test. Wishful thinking.
This is one of the top 10 easiest questions to blow on the exam. On LI I caught myself making the same mistake when I was checking my answers, guess the lesson is to slow down, or fly through the exam with enough time to go back and review…
That is what I am usually afraid of while taking the test. For LI, I knew my stuff. But when I come to an easy question, I usually think I know the answer without reading or thinking through everything. Something simple like this can throw any future calculations or concepts off. I had to remind myself going into the test to slow down and think through the logic before committing to an answer. I should probably start doing that now…
Always ask yourself - is the currency they are asking about cheaper or dearer in the future (more precisely for future delivery). If it’s cheaper it’s at a discount, if it’s dearer, a premium. So here, they are asking about CHF. In the future, it will take MORE CHF to buy 1 USD. So it is cheaper in the future, so it’s at a forward discount.
Just to refresh my memory… what is the annualized discount in this q? is it (S - F)/S (360/30)?
I like chrimaths’ logic. I find it very helpful when I solve such problems as the one above.
The problem with the FC/DC notation for those who work in the FX markets is that the meaning is the exact opposite. I trade currencies everyday and i found it difficult to internalise/remember and apply in problems the fact that EUR/US$ in CFAI texts means number of Euros per US dollar. In other words, if CFAI text says EUR/US$ rate is 0.6544, then its the number of Euros it would take to buy 1 US dollar. For an FX trader, its just the opposite. In this CHF example, the US$/CHF price as understood by CFAI text users is taken. The market trades in terms of the inverse of that price and is still the US$/CHF rate. It became easier when i saw the logic : 1.9$/Big Mac (or some such price). The price is being expressed for 1 of the latter. Just imagine a trader on the FX floor buying and selling based on such “theoretical” notions !!!
don’t laugh at me, haven’t really touched fx yet… so in this example the dollar is stronger 30 days out, and that’s why it’s trading at a ‘discount’ today - and if the dollar is weaker against the chf 30 days from now, it’s currently trading at a premium, right? I swear this exact problem was on LI in June and I got it right… I have a lot of cobwebs to clear out.