Schweser Reading #34


thos of you that have the schweser notes can someone please explain to me why answer for #11 (german porfolio manager) uses power of 2/12 instead of 2/3? the questions says that he entered a 3-month forward contract and the spot rate is given a month into it…is this an error or am i missing something?


which SS,

ooops sorry. reading #34 question 11

even reading your question makes the answer clear . It is obviously an annualized rate , so if two month are left in the contract the FV will grow by rate ^(1+2/12)

sorry i still dont get, i understand its annual rate so monthly would be r/12, so then can you take (1+r/12) ^ (2/3)?

where is the 2/3 ever coming up from?

please go back to your forwards basics. It is a 3 month contract … so originally it would have been (1+r)^(3/12)

now it is a 2 month contract - it becomes (1+r)^(2/12)

2/3 means 8/12 if annulize the rate. think about what it means.

it means you have 8 months out of 12 months to go to maturity.

2/12 means you have 2 months left until maturity.

what would you use if the rate given was monthly rate not annual?

(1+r)*(1+r) - 1