Important, Level 1, Level 2
= [ (forward rate – spot rate) / spot rate ] * [ 12 / number of months forward ] * 100%
From → Economics
Is the formula correct for both direct and indirect quotations, assuming no conversions are needed? (both spot and forward are in either domestic or foreign currency terms)
The formula above is correct because sometimes you might have to calculate the “annualized forward premium” the key work being “annualized”. Your question seems too specific for a single multiple choice CFA Level 1 question. I’m not a forward currency expert, I don’t even hold the CFA charter. You’re going to have to post this question to analystforums if you really want to know the answer. My gut says on the CFA Level 1 exam they are unlikely to go into this much detail assuming they even ask for the annualized premium.
The formula is correct for both direct and indirect quotations.
Thanks for commenting.
This blog was never intended to answer every possible question on the Level 1 CFA curriculum, especially considering the curriculum changes every year. It was just a collection of flash cards that I made while studying for and ultimately passing the CFA Level 1 exam. I will have to post my Level 2 cards, but first I need to pass that exam perhaps.
I stand by my previous answer, for the purpose of the Level 1 CFA exam knowing the formula and applying it, should be sufficient to answer most questions on calculating the annualized forward premium. I did look for a link confirming this, but could not find a definitive one in a reasonable amount of time. Hopefully this blog continues to be of use to candidates.
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