I found out that CFA text gives 2 version of Interest Rate Parity formula. In Reading 54, exhibit 9, the interest rates used are the annual interest, where the (1+ra) or (1+rb) are to the power of (T-t). BUT in Reading 17, Example 6, the interest rates used are the “periodic interest rates” or “actual interest rates” which are obtained by multiplying the annual interest rates by the factor of time i.e. multiply by 3/12 if the contract is 3 months.
Anyone can enlighten me on the above, as both formula will churn out different results. TQ.
Anyone can enlighten me on the above, as both formula will churn out different results. TQ.