Schweser Error Regarding Forward Points?

CFA Level III
#1

Reading 28; currency management, there seems to be a contradiction in the schweser reading and concept checkers regarding what a 1.0 forward point is in decimals. The reading on page 91 shows that a forward point of -1.0 is the equivalent to -.0001 when adjusting currency forward prices. However, Question 8 in the concept check shows that -1.1 is equivalent to -.000011, which is one decimal place longer than implied by example on page 91.

Question 8:

EUR/KRW is at .00068 the forward points for the three month contract as specified by the question is -1.1

The schweser answer says .00068-.000011 to get .000669. Shouldn’t the answer in fact be .00068-.00011 for .00057?

Let me know if anyone else agrees/disagrees.

Thanks!

#2

Forward points are generally expressed in pips which is the smallest movement in currency. The question quotes the initial rate to 5 decimal places. So 1 pt is 0.00001. For example in real life usd to cad is quoted to 4 dps. Eur to cad is quoted to 5 dps. When traders talk about points the number of decimal places depends on how many dps are in the underlying rate

#3

The one’s place in the forward points is equivalent to the least significant digit in the spot quote. So, if the spot quote gives five decimal places (as 0.00068), then the least significant digit is the 1/100,000s place, so forward points of -1.1 means -1.1/100,000.

As another example, JPY/USD spot quotes are generally given to only 2 decimal places (e.g., 102.87), so forward points of +3.2 would mean +3.2/100.

#4

I don’t know what I find more disconcerting

  1. the fact that I previously thought that forward points = pips therefore divide by 10,000 and now I need to learn another rule

or

  1. the fact that I’ve read this section and I’ve done all the BB’s and EOC’s and I didn’t even notice this
#5

+1

#6

Thanks Bay and S2000. This makes perfect sense now.

#7

Cool!