FRM Handbook - Example 5.1 [from FRM Exam 2005 - Question 2]

[RickOrr3]

Hello -

I do not understand why the calculation uses T=1/12 when the question states that the time to expiration is 3 months.

Thanks,

 

[David Harper CFA FRM]

Hi Rick,

You are correct, the handbook has a formula error, but still the answer is correct.
The reference to formula 5.6 applies to foreign currency forward (hence the two rates, r and r*) and does not apply here ...

Example 5.1 only requires ordinary commodity forward:
Expected[Forward(0)] = Spot(0)*EXP[6% rf + 3% storage carry)*3/12] = $1,022.8 (answer c)

...good catch (!), i'll add to errata. David