Did anybody find the practice problems in the CFA book for this chapter ridiculous? I use to think of these type of questions as easy, but the way they present them, with this crazy process of first finding # of contracts, then PVing that back to find out how much to invest in the RF asset, then incorporating dividend yields and finding out how many effective shares you’ve purchased… my brain is exploding. I do not remember seeing this type of shit anywhere else but the back of this chapter… usually they just want me to tell how many contracts to buy/sell.
Also… quick basic question but the theory is annoying me Page 325 of volume 5 – #8
It’s one of those “hedge or not hedge” questions and gives you both inflation rates and interest rates for one year. The answer says you should hedge based on the interest rate differential implying a larger appreciation than you expect in the market, which is all good, but what I don’t quite get is that since they provided inflation in the table, couldn’t we argue that USA actually has a higher real interest rate and therefore should appreciate vs depreciate? It’s been a while since L2 but isn’t one of the tenets of covered IRP that it assumes real rates are equal so that nominal rate differentials are explained by inflation?