No arbitrage forward rate

CFA Level I Economics
#1

according to books, it told the formula of no arbitrage forward rate is ( forward rate(A/B) / spot rate(A/B) ) = ( 1+interest rate A / 1+interest rate B ), but i check out this formula , it should be = ( 1+interest rate B / 1+interest rate A ). i examine it with wikipedia formula. and the result is the same as i though. so what do everybody else think ?

the formula in wikipedia is ( forward rate / spot rate ) = ( 1+interest rate domestic / 1+interest rate foreign )

#2

The formula is correct as written:

forward\ rate_{A/B}\ =\ spot\ rate_{A/B}\left(\frac{1\ +\ r_{f_A}}{1\ +\ r_{f_B}}\right)

Therefore:

\frac{forward\ rate_{A/B}}{spot\ rate_{A/B}}\ =\ \frac{1\ +\ r_{f_A}}{1\ +\ r_{f_B}}
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#3

thank you !!

#4

Hi, anyone can help why to find the forward rate A/B = spot rate A/B has to multiply with (1+r A)/(1+r B) instead of (1+r B)/(1+r A) ? thank you

#5

I wrote an article about the no arbitrage forward exchange rate:

http://finexamhelp123.wpengine.com/covered-interest-rate-parity-irp-pricing-currency-forwards/

(Full disclosure: as of 4/25/16, there is a charge to read the articles on my website. You can get an idea of the quality of the articles by looking at the free samples here: http://www.financialexamhelp123.com/sample-articles/.)

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#6

wait wait this doesnā€™t make sense to me
the way the CFA curriculum defines currencies are that they are quoted as A/B where currency A is the base meaning that mathematically A is in the denominator. So when that is the case, it should be = ( 1+interest rate B / 1+interest rate A ), which what I assume is the confusion.

Do you guys know when A/B is meant to denote that A is the base ccy and when itā€™s supposed to denote that B is the base ccy? It seems to flip around, unless im missing something

#7

In fact, thatā€™s not how they quote them. When they write BGP/EUR 0.8587 they mean that GBP 0.8587 buys you EUR 1.0; GBP is the price currency and EUR is the base currency.

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#8

Ohh Iā€™m sorry I think I understand my confusion, didnā€™t realize that the placement of the ratio number (before or after the currency pair ā€œA/Bā€) mattered in convention, which was tripping me up. But makes sense to me now. Thanks a lot for the help!

#9

My pleasure.

#10

Taking nothing away from anybody and adding in another vote of thanks to the magician - this is precisely where I urge everybody and advocate all to abandon the formula thing. If your motto is to ā€˜memoriseā€™ formula and somehow get over the hump then let me assure you you may pass your CFA ā€¦ eventually but you will never enjoy let alone internalise it.

Itā€™s a beautiful journey for the experienced pro and the uninitiated newbie. Donā€™t merely look at it as 3 exams. I never did.

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