Forward Currency Pricing Conflicting Formulas - Econ Vs Derivatives

[Mark666]

Hello,
I am very confused. THe formulas for the pricing of a forward currency are different in Econ and Derivatives:
In Econ it says:
Forward = Spot * (1+iFC)/(1+iDC)
In derivatives it says:
Forward = Spot * (1+iDC)/(1+iFC)
Can someone explain please?

 

[CMLSML]

I would bet that in econ spot is defined as FC/DC and in derivatives, spot is defined as DC/FC.

 

[S2000magician]

Gotta be.

 

[Mark666]

CMLSML wrote:
I would bet that in econ spot is defined as FC/DC and in derivatives, spot is defined as DC/FC.

Hi,
Yeah you are right. THanks for your answer.
Dont you think this is a little silly? Why not keep some consistency?

 

[S2000magician]

Different authors for different topics.
I agree: consistency would be nice.
Sigh.

 

[kos]

It definitely is.
I like the way that s2000 presents it on his site. (i.e. PC / BC. instead of FC/DC). Keep it consistent and you are good.
http://financialexamhelp123.com/pricing-currency-forwards/

 

[S2000magician]

kos wrote:It definitely is.
I like the way that s2000 presents it on his site. (i.e. PC / BC. instead of FC/DC). Keep it consistent and you are good.
http://financialexamhelp123.com/pricing-currency-forwards/

I probably shouldn’t betray this, but I just changed it earlier this week; it used to be DC/FC.
(Whew!)

 

[Mark666]

ok guys thanks!
But during the exam. They gonna tell us whether the quotes are DC/FC or FC/DC?
Can they do one way for Derivatives and the other way for Econ during the exam?

 

[S2000magician]

They’re going to tell you that the quote is USD/GBP, or BRL/INR, or CAD/JPY, or whatever.

 

[Mark666]

S2000magician wrote:
They’re going to tell you that the quote is USD/GBP, or BRL/INR, or CAD/JPY, or whatever.

OK but it does not tell me which one is base currency and price currency.
USD/GPB in Econ is PC/BC
But in derivatives it is BC/PC
How am I supposed to know?

 

[S2000magician]

It’s always PC/BC.
Nobody ever quotes the price of oil in barrels-per-dollar; it’s always dollars-per-barrel.
For USD/GBP, USD is the price currency, GBP is the base currency (the commodity).

 

[Mark666]

S2000magician wrote:
It’s always PC/BC.
Nobody ever quotes the price of oil in barrels-per-dollar; it’s always dollars-per-barrel.
For USD/GBP, USD is the price currency, GBP is the base currency (the commodity).

OK got it. So I dont understand why the 2 formulas are not different.
During the exam:
If I am in the econ section of the exam I have to use the ecom formula?
If I am in the Derivatives section I have to use the Derivatives formula?
Thx a lot

 

[S2000magician]

You got it.
My pleasure.

 

[CMLSML]

Mark666 wrote:

S2000magician wrote:
It’s always PC/BC.
Nobody ever quotes the price of oil in barrels-per-dollar; it’s always dollars-per-barrel.
For USD/GBP, USD is the price currency, GBP is the base currency (the commodity).

OK got it. So I dont understand why the 2 formulas are not different.
During the exam:
If I am in the econ section of the exam I have to use the ecom formula?
If I am in the Derivatives section I have to use the Derivatives formula?
Thx a lot

Just take a day off on June 6 Ace.

 

[lammy]

Thanks for the link to financialexamhelp123.

 

[onlysimon]

S2000magician wrote:
They’re going to tell you that the quote is USD/GBP, or BRL/INR, or CAD/JPY, or whatever.

CFAI never use that notation.
They always say something like “1 GBP buys 1.5 USD” dont worry about the mixed up notation in the books.

 

[S2000magician]

onlysimon wrote:

S2000magician wrote:They’re going to tell you that the quote is USD/GBP, or BRL/INR, or CAD/JPY, or whatever.

CFAI never use that notation.
They always say something like “1 GBP buys 1.5 USD” dont worry about the mixed up notation in the books.

Even easier.