CFAI vol. 4 page 154 problem # 21: The problem asks for unhedged return. I applied the formula : Return in local currency + f appreciation + (Return in local currency * f appreciation) In the answer, they just add the two. I remember somewhere they say specifically not to do that. I am confused.
5.31% is not precise (only approximate). Precisely : (1+0.0436)x(1+0.0095) - 1 = 0.0535 = 5.35% (1+a)x(1+b) - 1 = 1+a+b+ab-1 = a+b+ab
AMC, TVM. If you see the solution, they just add it. Is that correct? Or the way I have done it is correct? Your answer is very brief-can you expand please?
a is Return in local currency b is f appreciation (1+a)x(1+b) - 1 = (1+Return in local currency) x (1+f appreciation) -1 = Return in local currency + f appreciation + (Return in local currency * f appreciation) So the fomula applied by you is correct (precisely).
AMC, That is exactly my confusion. In the answer given, it’s added. so on the exam, which one to use?
To save time : Use “Return in local currency + f appreciation” For precision : Use " Return in local currency + f appreciation + (Return in local currency * f appreciation)"
I plan on using a + b + (a*b) to be safe on all problems like this. In the same way I plan on calculating nominal return as (1+inf)(1+real) rather than real+inf. I figure you cant be wrong for being to precise.
This was brought up in this forum earlier. I choose to follow CFAI convention in the reading #30 where the Los comes from. Throughout the session (Vol4 Page 134-137), both the formula and three examples are using an additive method.