- This topic has 6 replies, 3 voices, and was last updated Oct-186:37 am by
.
-
Posts
-
-
Hi everyone,
In one exercise of the CFA ressources in the Economics part they ask the mark-to-market value of a forward position. The answer is straight forward but is not consistent with the valuation of a currency forward given in reading about forward valuation (Value of currency forward at time t = Spot FX rate at time t / (1+Foreign interest rate)^(T-t) – FX Forward rate set when contract initiated / (1+domestic rate)^ (T-t)) in the Derivative.
Is anyone able to explain why the mark-to-market value of a forward position is not the same as the Value of currency forward ?
Thank you!
Antoine -
This is a very common question in level II. To value a currency forward in economics is one equition but in derivatives they use another. You can, and I have, been able to derive that they are both the same equation (sort of). Just know this for the exam; in Econ they use simple interest 360/60 convention, but in derivatives they use actual/actual convention. If you are asked to value a forward in econ use that formula, if its in derivatives then use that formula. that’s all there is to it. This drove me nuts for about 2 weeks so I know how you feel.
-
-
Also, I’m not sure if anyone else can verify this, but from the sets I’ve done, I have not seen many questions with answers close enough to know if you compound or not. The other two answers usually seem to be using a totally different method that is far off either of these two methods, ie. you may not calc the same answer, but it’s going to be within a dollar of one of the answers(but the not the others)
-
Hopefully CFAI wouldn’t be so cruel to set us up for failure because we use the wrong interest rate/discounting conventions. That’d just be wrong haha. Anyways my rule of thumb is if you see the word LIBOR use 360/30 simple interest. Currencies, equities are actual/actual convention. EXCEPT for currency forwards in economics, the author uses 360/30 convention for some reason.
-
If you check out the online CFAI version they have a footnote for that page. Basically says, if you’re doing it as “real investor” stick to the compound version. Speculating/too busy cramming to check, but I think they may just be quoted in that manner? I’ve never seen a real fx quote though lol. equities and options for mee
-
When valuing them in real life it always depends on your situation. If you realistically have the ability to get compound interest for a 365 day year, or reinvest equity dividends on an index for 365 days of the year, etc then use 365 but I find that hard to believe. There is no 100% right way, its depends on what your valuing it for. Its different in econ and derivatives simply because the author made it that way.
-
- You must be logged in to reply to this topic.