2017 Reading 40 Example 16

CFA Level II Derivatives
#1

This example (page 317 of print) already has a correction in the errata, but I think there is still an issue. Please tell me where I’m going wrong.

US-based company wants to borrow in AUD to fund Australian subsidiary, but decides to borrow in USD and convert loan to AUD using currency swap.

USD loan -> owe USD, implying needed currency swap is receive USD fixed, pay AUD fixed. Net of loan and swap -> pay AUD

Payments are quarterly (hence erratum, print solution assumes annual), 60 days have elapsed and given new term structure.

PV of remaining AUD payments as of day 60 = 100,000,000(0.00692381(3.967683)+0.986031) = AUD 101,350,248.32

PV of remaining USD payments as of day 60 = 87,719,298(0.00062422(3.994841+0.998336) = USD 87,792,075 * 1.13 = AUD 99,205,045

Value of swap = PV of payments received - PV of payments owed

Swap described in setup should be receive USD, pay AUD (although the problem never spits this out).

=> Value of swap = 99,205,045 - 101,350,248.32 = negative AUD 2,145,203.

The corrected answer in the errata says the value is positive AUD 2,145,203. What am I missing?

#2

It sounds to me as though you’re correct; I haven’t checked the curriculum nor the errata.

You should write CFA Institute and ask them: info@cfainstitute.org. They’ve always been good about responding when I’ve e-mailed them.

Let us know what they have to say.

#3

I heard back – yep, it is an error.

Thank you for confirming I wasn’t nuts.

#4

Whoa, there, Dearie!

I _ never _ confirmed that you weren’t nuts. You could be Planter’s Dry Roasted in spades for all I know. The fact that you’re a Level II candidate _ CFA Charterholder _ would certainly qualify as circumstantial evidence to that effect.

All I did was confirm that this example didn’t provide evidence that you’re nuts.

Carry on.

wink

#5

Ha! Good point!

Actually, I’m a Charterholder preparing this material for class at my university. Analyst Forum is a good way to figure out where candidates (and my students) struggle. Or to make sure I’m not doing something stupid before I embarrass myself emailing CFA Institute!

Professor does point toward probably not normal, even more so than Level II candidate. laugh

#6

Well, don’t I feel stupid?

I fixed it.