bodhisattva

alta168 Wrote:
-------------------------------------------------------
> Paraguay Wrote:
> --------------------------------------------------
> -----
> > The spot and forward rate weren't in interest
> rate
> > parity.
>
> Why ? Usually we assume IRP hold if I/R of DC & FC
> are given, right ?

Lots of discussion about this question. I would have assumed the same, however if given the forward and spot rates I guess you should use them to calculate return.

Windjammer

Is this a EOC question? If do, what #?

bpdulog

Answer is 5.6%

liangfeng

Paraguay Wrote:
-------------------------------------------------------
> The spot and forward rate weren't in interest rate
> parity.


this is very important ......................see if you use the IRP approxiamtion you are implicitly assuming the forwards and spot rates are in parity ...............as evidenced by this CFAI q thats a wrong assumption. 5.2 % was there as well as 5.6% ...............5.6% is what you would earn if you used forwards , 5.2 is what you would earn using spot.................


More interesting is the case what if you would ern more in the spot market than in the forward market ( opposited of the case above) would you avoid the forward and invest in spot?

Roflnadal

I didn't see an ending spot rate so I did this:

S1 = .69(1.03/1046) = .6794

Change in S = (.6794-.69)/.69 = -.0153

Rd = Rlc + s(1+Rlc) = .085 - .0153(1.085) = .0684

Rf = (.67-.69)/.69 = -.029

Rh = Rd - h(Rf) = .0684 - 1(-.029) = .0974

NO EXCUSES

Unforseen

pfcfaataf Wrote:
-------------------------------------------------------
> hedged return = (0.67/0.69 x 1.085) - 1
>
> as
>
> 0.67 > 0.69 x 1.013/1.046 (but you hedge at 0.67)

this is incorrect because this solution assumes you hedge the expected return too, but based on the book (as Paraguay said: "Foreign bond chapter says use addition rather than multiplicative. more ambiguity.") the correct solution is:

Posted by: jmac01 (IP Logged)
Date: June 1, 2011 03:31PM

currency return .67/.69-1=-2.9%
local return=8.5%
8.5%-2.9%=5.6%

Windjam

What page is this on?

NO EXCUSES

Analyze_This

132 - 135 V4

skycfa

Thanks, why are they even going into this formula when they have other formulas we have to remember for this section that aren't even consistent?

This reading is very convoluted.

NO EXCUSES

Windjammer

bpdulog Wrote:
-------------------------------------------------------
> Thanks, why are they even going into this formula
> when they have other formulas we have to remember
> for this section that aren't even consistent?
>
> This reading is very convoluted.

I think you mean this curriculum is convoluted. It seems like they had a lot of writers who all wanted to put something in and decided it would be easier to contradict each other than to write together.

I just pray the curriculum is about passing people that know it rather than English and question trickery.

Trickery does not prove who knows things, just who is methodical and not the conservative investor who researches kind.



Edited 2 time(s). Last edit at Wednesday, June 1, 2011 at 01:13PM by Paraguay.