2 basic questions to clarify (continuously compounded and FX foward)

[cfaretaker]

Looking over old notes and revising some forgotten areas - when you do a continuously compounded rate calculation, when do you convert the rate using LN(1+r) before using it with e^? Is it always the case?
For FX forward, for some reason I came across an old note which shows that the FX forward should be calculated this way when with Libor
USD/CAD = Spot [(Libor of CAD)/(Libor of USD)]^t
Did I write the Libor numerator and denominator backwards?

 

[S2000magician]

First, the only place in the CFA curriculum where you need to use continuously compounded interest is in calculating forward prices on equity indices.
Second, your formula for the forward exchange rate has the interest rates backwards: USD grows at the USD risk-free (LIBOR) rate and CAD grows at the CAD risk-free (LIBOR) rate, so you should have USD LIBOR in the numerator and CAD LIBOR in the denominator.
Third, your formula for the forward exchange rate needs a couple of 1s in it:
Forward USD/CAD = Spot USD/CAD × [(1 + USD LIBOR)/(1 + CAD LIBOR)]^t

 

[cfaretaker]

S2000magician wrote:
First, the only place in the CFA curriculum where you need to use continuously compounded interest is in calculating forward prices on equity indices.
Second, your formula for the forward exchange rate has the interest rates backwards: USD grows at the USD risk-free (LIBOR) rate and CAD grows at the CAD risk-free (LIBOR) rate, so you should have USD LIBOR in the numerator and CAD LIBOR in the denominator.
Third, your formula for the forward exchange rate needs a couple of 1s in it:
Forward USD/CAD = Spot USD/CAD × [(1 + USD LIBOR)/(1 + CAD LIBOR)]^t

Thanks - for continously compounded equity indices, the rate should always be restated first using Ln, the natural log?

 

[spb315]

Depend on how they present the number to you. I’ve seen cases where they provide the continuosly compounded Rf rate and others where they provide just the risk free rate. If the continuosly compounded Rf is provided, you don’t need to do anything to it. If the risk free rate is not already continuosly compounded, restate using the natural log first.

 

[Ashah2602]

S2000magician wrote:
First, the only place in the CFA curriculum where you need to use continuously compounded interest is in calculating forward prices on equity indices.
Second, your formula for the forward exchange rate has the interest rates backwards: USD grows at the USD risk-free (LIBOR) rate and CAD grows at the CAD risk-free (LIBOR) rate, so you should have USD LIBOR in the numerator and CAD LIBOR in the denominator.
Third, your formula for the forward exchange rate needs a couple of 1s in it:
Forward USD/CAD = Spot USD/CAD × [(1 + USD LIBOR)/(1 + CAD LIBOR)]^t

What about the continuously compounded currency forward pricing/valuation?

 

[breadmaker]

Just to clarify:
continuosly compounded rate = ln( 1+ effective annual rate)

 

[S2000magician]

Ashah2602 wrote:

S2000magician wrote:First, the only place in the CFA curriculum where you need to use continuously compounded interest is in calculating forward prices on equity indices.
Second, your formula for the forward exchange rate has the interest rates backwards: USD grows at the USD risk-free (LIBOR) rate and CAD grows at the CAD risk-free (LIBOR) rate, so you should have USD LIBOR in the numerator and CAD LIBOR in the denominator.
Third, your formula for the forward exchange rate needs a couple of 1s in it:
Forward USD/CAD = Spot USD/CAD × [(1 + USD LIBOR)/(1 + CAD LIBOR)]^t

What about the continuously compounded currency forward pricing/valuation?

I’ve never seen it in any forwards other than equity indices.