I am quite sure in the solution, the calculation of lease payment (4.78) is wrong, and so the arbitrage profit. the least payment should be difference these two term: 316* e^(5%/4) - 316*e^((5%-6%)/4) 319.97479 - 315.21099 = 4.7638 The first term is the no-arbitrary forward price if lease rate is 0, The second term is the no-arbitrary forward price if the lease rate is 6%. The difference between two term is the FV of the lease payment arbitrary profit = -313 - 4.7638 + 319.97479 = 2.21099 verify: the arbitrary profit should equal the difference between no-arbitrary forward price and the actual forward price 316*e^((5%-6%)/4) - 313 = 2.21099
I had the same 2.21 vs 2.19 or so that they had in the guideline. But I was not confident in my calc/reasoning. I think I went: short spot @ 316 invest 316 at rfr 5% and pay lease rate of 6% for 3 mos = 316 e ^ [(0.05-0.06)3/12] =315.211 purchase 3 mos fwd = -313 net profit = 315.211 - 313 = 2.211
I also had 2.21. Calculated it like slouis
jblazarus Wrote: ------------------------------------------------------- > I also had 2.21. Calculated it like slouis same here
Hi I think there is an error is the answer, where it says sell the spot at 316. That figure should be discounted by the lease rate and should be 311.3. See pg 166, Volume 5 of CFAI Reading 39. Once that change is made the answer that most of you have calculated, 2.21 (which has to be right given that you have plugged in the numbers into the formula in the readings!) matches the long-had tabular form used in the answer to Q6. Look forwward to your comments.
NOTE: see page 165-166 , Volume 5 -in particualr boxes -judging from that alone, your calculation is correct-ie the answer provided is probably wrong -might be of interest to anyone who failed 2008 exam
They are using discrete compounding versus continous compounding. Supposedly, they will accept either answer.
no- -see the box in the answer-the left (ie Time 0 section) does not use the tailed position as is referred to on page 165-166 , Volume 5 .This has nothing to do with discrete versus continous compounding. -also-when do you use discrete and not continuos compounding?
Have you looked at the Schweser video that goes over each answer in detail? It’s in the full Schweser library. It may help answer your question.
Isn’t this just a matter of rounding? It looks like the solution calculates the return on the zero coupon bond and cost of the lease rate separately rounding both off to hundredths. Am I wrong? By the way hi, I’m new here.
Sorry I looked at this in more detail and I realize I didn’t really notice this subtlety. Can someone explain why the Spot rate at time zero is discounted by the lease rate? I see that they do it in the book on 166, with the Tailed position, but I can’t figure out why this is necessary. Thanks
i am not using schweser-prefer to stick with CFAI material-so why is a tailed position not used in this particular problem?
The only thing I can think is that the maybe this section was different in last years book. For those of us who don’t have schweser, does anyone have a good explanation for how this tailing works?
are you suggesting that the concept has changed? See page see page 165-166 , Volume 5, CFAI Readings -in particualr boxes -for a clear explanation of how/why/when a tailed position is used.
I got 2.21 also.
time to accept that there is an error in the 2008 Exam marking scheme?That some people may have lost marks eventhough they were right?
The book says that they tail the spot price to offset the lease rate. Does anyone know what this means?
Do you think we should play it safe and just leave it at 1 decimal place? Answer being 2.2? Or too risky?