标题: Return on FC bond in DC terms [打印本页] 作者: ba736 时间: 2011-7-11 19:24 标题: Return on FC bond in DC terms
Hey guys,
I’d like to clarify a point regarding the calculation on return on a bond in the DC. I'm looking at p. 493 of CFAI Book 6, Example 4.
RFR DC = 5%
RFR FC = 3%
This implies the forward exchange rate quotes at a premium of 2%. CFAI state that the expected exchange rate appreciation of FC is 3%. The foreign exchange risk premium is then easily computed as:
The next part is where I'm confused, calculating the return in the DC. They simply add the 3% FC RFR with 3% expected currency appreciation and get 6%. Would you not gain 1.03*1.03 or 6.09% instead? I know this seems trivial however my fear is they would put both 6.00% and 6.09% as possible answers on the exam.
On p.493 the CFAI says clearly “the DC return on FC investment is equal to the FC RFR + the expected percentage movement in the exchange rate”. This appears to conflict with Ex. 2, question 1 on p 490-491 where they multiply the two terms.
It's the same type of question, calculate the return on the foreign bond in DC. They then provide two answers, an approximate of 5% (3%+2% = 5%) using the same intuition as Example 4, then say the return is more accurately 5.06% (computed by calculating the return geometrically which makes more sense to me) as below:
They add in every example (Ex 2, Ex 4, and EOC 11) except for that brief note in Ex 2 where they multiply and say “more specifically”. I think the safe bet is just to add, but I wanted to hear your thoughts. Am I missing anything?作者: wizofoz 时间: 2011-7-11 19:24
You are correct, it should be multiplied. But I think they're just adding it to approximate the return. Don't sweat it too much, in the exam just add and see if you get the answer. If not, multiply.作者: iteracom 时间: 2011-7-11 19:24
I'm worried both will show up, the return computed from addition as well as the geometric..
The text seems to add everywhere, so I think thats the safer bet.作者: onelife1 时间: 2011-7-11 19:24
CFA seems to alwas add them...
The correct one would be to multiply, but in most cases it would not make a diff...
I would not worry about CFA trying to trick you with this. I dont think thats what they are looking for
