Reading 62 Q # 6-7

CFA Level II Portfolio Management
#1

A couple of issues im finding confusing in reading 62. Any help would be appreciated.

  1. For both these questions when calculating the returns from foreign investments they use a multiplicative formulas (1+return)(1+appre/depreofcurrency)-1. However in the reading p 488 the formula is an addition formula Rfc+s. The results are different depending on which one you use.

  2. If you follow through with the multiplicative formula and substitue for appre/depre using (x2-x1)/x1 the answer will be different than if you use the way the answer is in the book. The way they do it in the book is using inflation differential instead of (x2-x1)/x1 where x2 is ppp formula (s * 1+idc/1+ifc)

#2

Because both methods give the same result approx up to 1st decimal place, I guess the CFA questnaire knows this. The underlying finance theory is more important than the accuracy. I doubt if they test us for accuracy.

To address this question, I always followed the convention of approximation for currency appreciation/depreciation.

Thanks.