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DOUBT: for 15:00, why wouldn't A be a better option for Q2 of example 6. Euro could be expected to depreciate for a variety of reasons that may not be part of the example (impending doom). Where maybe even the low interest rate may not be able to negate that effect. Ergo, A is a safer option (stays true in more situations than C)
15:04 You gave the correct answer as C. Does that mean that A is wrong, or A is also right but not the best interpretation? I am asking this because as far as I am concerned the minus sign forward rate means that the base currency depreciated as it will be able to buy less price currency.
5:45 your formula is different from the formula given by Curriculum F f/d = S f/d (1 + if) / (1 + id) so F b/p = S b/p (1 + ib) / (1 + ip) Instead of F p/b = Sp/b (1 + ip) / (1 + ib) correct me if I'm wrong. Thanks IFT!
there is no error. In the case of an indirect quote, the foreign country is taken as the price currency and the domestic country is taken as the base currency. IFT support team
@@IFT-CFA Then it must have been written as 0.87520. Because we simply counted the digits in the previous example. So there must be additional 0 at the end (although it has no power).
In the last example, LIBOR rates are given for 270 days, so why are we multiplying the rates by 270/360? multiplying means that we are considering the rates for 360 days
If the forward contracts is for x days, make an adjustment based on x/360 convention unless told otherwise. forward rate is calculated as: IFT Support Team
for the very last example with 270-day LIBOR rates: I'm getting 0.84852 (you're showing 0.84862) for the forward rate when making that calculation - should it be 0.84852? ( credit to Ted Andersson in comment section) Therefore, the forward point should be -4 instead of -2.8. Hope IFT team will clarify on this. Thank you IFT Team.
In the french company example is the GBP/EUR value is decreasing, shouldn't that mean the company can buy lesser amount of GBP with 1 euro ? If so, then why is the company selling GBP , shouldn't they be buying it ?
The French company is receiving payments in GBP. It would want to convert the GBP to its domestic currency, the EUR (it wants to sell GBP, buy EUR). Hence, if GBP is depreciating or EUR is appreciating, it would buy EUR and sell GBP. IFT support team
IFT sir I have the same doubt as Euro is getting weaker in foreign market that means gbp is appreciating then if the company will get gbp in future wouldn’t the company will be more profitable if it doesn’t do hedging
You are most welcome! IFT's objective is to help CFA candidates around the world. There is more material on our website: ift.world/ Please like our FB page (facebook.com/CFA.Trainer) and join Analystforum.com where I will be most grateful if you can show your status as “Studying with IFT”. Thank you! - Arif and the IFT Team
for the very last example with 270-day LIBOR rates: I'm getting 0.84852 (you're showing 0.84862) for the forward rate when making that calculation - should it be 0.84852?
No, there is no error.The French company would want to convert the GBP to its domestic currency, the EUR (it wants to sell GBP, buy EUR). The forward rate would be equal to: 0.8752 + (-1.4/10,000) = 0.87506.IFT support team
So can we say: 1. To convert forward points to forward rate: FP/10,000÷SR X 100. 2. To find forward rate: SR - FP/10,0000. 3. To find forward points: FR - SR X10,000. ?
To convert forward points into a forward rate, divide the points by 10,000 if the exchange rate uses a four decimal place convention and by 100 if the exchange rate uses a two decimal place convention, and then add to the spot rate.FR = SR + (FP/10,000)FR-SR = FP /10,000FP = (FR - SR)*10,000 IFt support team
At 5.20 why are you saying if we convert points to 4 decimal divided by 10,000 but divided by 100 for 2 decimal place ? Doesn't make sense to me. Thank you Sir
Active learning is proven to increase understanding and retention by 3 times! To master the Level I Curriculum in 3 simple steps - visit: ift.world/active-learning/
You have just made the concepts of exchange rates very easy to understand from the lesson 1 video, thank you very much Sir.
Dear Smanga,
Thankyou for your your kind words.
IFT Support Team
DOUBT: for 15:00, why wouldn't A be a better option for Q2 of example 6. Euro could be expected to depreciate for a variety of reasons that may not be part of the example (impending doom). Where maybe even the low interest rate may not be able to negate that effect. Ergo, A is a safer option (stays true in more situations than C)
15:04 You gave the correct answer as C. Does that mean that A is wrong, or A is also right but not the best interpretation? I am asking this because as far as I am concerned the minus sign forward rate means that the base currency depreciated as it will be able to buy less price currency.
@15:42 shouldn’t the quoted 12 month forward rate be quoted as 4 decimals after the comma? which gives us the reason to multiply by 10 000 later
5:45 your formula is different from the formula given by Curriculum
F f/d = S f/d (1 + if) / (1 + id)
so F b/p = S b/p (1 + ib) / (1 + ip)
Instead of F p/b = Sp/b (1 + ip) / (1 + ib)
correct me if I'm wrong. Thanks IFT!
there is no error. In the case of an indirect quote, the foreign country is taken as the price currency and the domestic country is taken as the base currency.
IFT support team
@@IFT-CFA ok thanks! I got it
@@IFT-CFA Then it must have been written as 0.87520. Because we simply counted the digits in the previous example. So there must be additional 0 at the end (although it has no power).
5:20, if decimal is -0.15, isnt basis point (-15*10,000)=-1500 and decimal(-0.15*100)= -15%
You're working is incongruent between the first and second slides. Second slide has 15 bips, whereas first slide refers to -26.5 pips
Second slide talks about another example.
IFT Support Team
In the last example, LIBOR rates are given for 270 days, so why are we multiplying the rates by 270/360? multiplying means that we are considering the rates for 360 days
If the forward contracts is for x days, make an adjustment based on x/360 convention unless told otherwise. forward rate is calculated as:
IFT Support Team
for the very last example with 270-day LIBOR rates: I'm getting 0.84852 (you're showing 0.84862) for the forward rate when making that calculation - should it be 0.84852? ( credit to Ted Andersson in comment section)
Therefore, the forward point should be -4 instead of -2.8.
Hope IFT team will clarify on this.
Thank you IFT Team.
Very insightful and crisp
Dear Samrath,
Thank you for liking our material.
IFT Support Team
In the french company example is the GBP/EUR value is decreasing, shouldn't that mean the company can buy lesser amount of GBP with 1 euro ? If so, then why is the company selling GBP , shouldn't they be buying it ?
The French company is receiving payments in GBP. It would want to convert the GBP to its domestic currency, the EUR (it wants to sell GBP, buy EUR). Hence, if GBP is depreciating or EUR is appreciating, it would buy EUR and sell GBP.
IFT support team
IFT sir I have the same doubt as Euro is getting weaker in foreign market that means gbp is appreciating then if the company will get gbp in future wouldn’t the company will be more profitable if it doesn’t do hedging
Because the company wants to hedge not speculate.
Sir, but in this example GBP is appreciating
@@IFT-CFA But in the question, GBP is appreciating against the Euro.
Thank you so much for helping people
Thanks for your kind words.
IFT Support Team
this is amazing! thanks for the explanation. I love it :)
You are most welcome! IFT's objective is to help CFA candidates around the world. There is more material on our website: ift.world/ Please like our FB page (facebook.com/CFA.Trainer) and join Analystforum.com where I will be most grateful if you can show your status as “Studying with IFT”. Thank you! - Arif and the IFT Team
you are amazing!
Thank you so much for your comments.
IFT Support Team
What is the EUR amount that french company receives in that case? ( assuming company receives 1000 GBP) is it 1000/0.87506= 1142.77?
for the very last example with 270-day LIBOR rates: I'm getting 0.84852 (you're showing 0.84862) for the forward rate when making that calculation - should it be 0.84852?
I have the same answer as yours, then the forward point should be -4 instead of -2.8. Hope we will get IFT's team clarification on this.
13:48 forward rate is wrong?
No I think we did the same mistake at first. You have to divide it by 10000 as pips. I.e -0.00014+.8752
No, there is no error.The French company would want to convert the GBP to its domestic currency, the EUR (it wants to sell GBP, buy EUR). The forward rate would be equal to: 0.8752 + (-1.4/10,000) = 0.87506.IFT support team
So can we say:
1. To convert forward points to forward rate:
FP/10,000÷SR X 100.
2. To find forward rate:
SR - FP/10,0000.
3. To find forward points:
FR - SR X10,000.
?
To convert forward points into a forward rate, divide the points by 10,000 if the exchange rate uses a four decimal place convention and by 100 if the exchange rate uses a two decimal place convention, and then add to the spot rate.FR = SR + (FP/10,000)FR-SR = FP /10,000FP = (FR - SR)*10,000
IFt support team
@@IFT-CFA thank you for the clarification!!
At 5.20 why are you saying if we convert points to 4 decimal divided by 10,000 but divided by 100 for
2 decimal place ? Doesn't make sense to me. Thank you Sir
There is a mistake. We will multiply -0.15 by 100.
IFT support team
We have taken 360 days to de-annualise the interest rate but in one year there are 365 days then why not 365 and why 360?
If the forward contract is for x days, make an adjustment based on the x/360 convention unless told otherwise.
IFT support team