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Errors Found in Study Materials P1.T3. Financial Markets & Products

David Harper CFA FRM

David Harper CFA FRM
Staff member
Subscriber
#81
Hi @Elizabeth_Babalola Thank you, I hope you are keeping safe also! :) Can I clarify: do you mean that, in the denominator of the formula, instead of 1+Rf(T2 - T1), it should read 1+(Rf(T2 - T1))? And/or do you mean, in the equivalent calculation that, instead of (1+ 4.5 × 025), it should read (1+ (4.5 × 025))? If so, it's actually not necessary per order of operations (https://en.wikipedia.org/wiki/Order_of_operations) where multiplication is performed before addition. I do realize the calculator sets either way, but in mathematical expression, we (aka, everybody and commonly) rely on order of operations. Further, I think it's okay to expect the reader to understand that the discounting is with quarterly frequency is what's happening here; i.e., 1 + Rf*0.25 = (1 + Rf/k)^(T*k) in the case of k = 4 when T - 0.25 --> (1 + Rf/4)^(025*4) = (1 + Rf/4)^1 = (1 + Rf * 0.25). We should understand this is not annual compounding/discounting but rather discounting with quarterly compound frequency, if you like. If I misunderstood the correct requested, apologies?
 
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David Harper CFA FRM

David Harper CFA FRM
Staff member
Subscriber
#83
No worries! It would not be wrong to add the parens, but if we had to do that in every instance (to reinforce the order of ops), we'd have to redo a lot of formulas! :eek: Talk to you soon!
 

David Harper CFA FRM

David Harper CFA FRM
Staff member
Subscriber
#85
Hi @Elizabeth_Babalola My apologies, but that is a mistake. (Thank you!). It should be that either:
  • Solution given (follows text) is: 0.98*exp[(0.070 - 0.050)*2) = 1.020; or
  • Question setup (follows solutions) is: "Suppose that the 2-year interest rates in Australia and the United States are 3% and 1%, respectively, and the spot exchange rate is 0.9800 USD per AUD."
 
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