Incorrect solution to question in curriculum book 1 - forex market concepts?

CFA Level II Economics
#1

CFA Program Curriculum Lvl II Book 1, Reading 14, Page 495, Example 2 - Calculating the Forward Premium (Discount)

It might just be because it’s very late, but I cannot figure out how the book has come to the answer -0.0254 via the calculations & formulae listed.

Crunching the numbers just does not come out with that answer!!

The spot (CAD/AUD) is 1.0145

270 day LIBOR (AUD) is 4.87%

270 day LIBOR (CAD) is 1.41%

Can anyone shed any light here? I keep coming out with -0.03347, which isn’t even on their answer list!! (Closest is -0.0346, but pretty sure that’s just there as a trick as it’s the difference between the 2 interest rates).

Thanks guys & girls.

#2

[1+ 0.0141 * 270/360] / [1+0.0487*270/360] = 0.97496

or discount = 0.97496 - 1 = -0.02501

#3

(0.0141 - 0.0487) * 270/360 = -0.02595

#4

cpk is on the right track, but is not calculating it correctly. Your problem is not adjusting LIBOR to a 270-day rate.

#5

Yes thanks guys - so the book is wrong??

#6

The book’s correct:

CAD1.0145/AUD1.0000 × {[1 + 1.41%(270/360)] / [1 + 4.87%(270/360)]} = CAD1.0252/AUD1.0365 = CAD0.9891/AUD1.0000

CAD0.9891 - CAD1.0145 = CAD-0.0254.

#7

Thanks all - sorry if I’m being dense - S2000 - the calculation you’ve laid out above:

CAD1.0145/AUD1.0000 × {[1 + 1.41%(270/360)] / [1 + 4.87%(270/360)]}

Equates to 0.98103? How have you got to your answer?

There is a question in this vein in the end of chapter questions which works out absolutely fine and normally as I would expect, and exactly as I’ve been trying to solve this one, which is why I think something’s wrong with it!

#8

I’m an idiot - disregard the above, I know what I’ve been doing wrong!!

Thanks again all.

#9

Well . . .

. . . OK, then.

My pleasure.