Second Edition, 2001

by Richard M. Levich

As of August 3, 2006

  • p. 118 - In equation 4.7b, the left hand term should be SPPP , t+1. The t+1 is a subscript as in equation 4.7a.
  • p. 156 - In the second box labeled (5.4), "% expected interest rate" should be changed to "% expected inflation rate".
  • p. 157 - In the first box labeled (5.5), the equality sign (=) is missing.
  • p. 161 - The bottom line states that we can "clearly reject the alpha=0 and beta=1 hypothesis." Because the point estimates of alpha and beta are so imprecise, it would have been better to say that the alpha=0 and beta=1 hypothesis offers a very poor fit or explanation concerning exchange rate behavior.
  • p. 171 - There are two important typos in Box 5.2. (1) The price of the spot euro should be $1.0432 - $1.0442; (2) In the next to last paragraph, we should conclude that Path 1 is preferred because it entails the lower cost.
  • p. 241 - The fourth sentence in paragraph 2 of Box 7.2 contains an error. It should read "reflecting 20 days of interest at 6.0 percent." Just as for the Euro (whcih reflects 20 days of interest at 3.5 percent, we're assuming that the interest rate is set at time t2 when the open FX positions begin. The calculation also assumes simple interest on a 360 day year.
  • p. 257 - The answer to Exercise 2d in the Instructor's Manual is not correct. That answer has a sell signal followed by a second sell signal which is not possible. A graph (click here) helps to develop the correct answer, which is as follows:
    (a) The price on July 10, 1986 is 2.166. So a 2% rule issues a buy signal at prices above 2.209 DM/$ and a sell signal at prices below 2.123 DM/$. On July 11, the price moves to 2.194 which establishes a new high, but not a buy signal. If the price should fall to 2.150 (= 0.98 x 2.194), a Sell signal is triggered. This occurs on July 15, 1986 we Sell $ and Buy DM. The trade price is 2.150.

    (b) We are now looking for the second signal, a Buy signal where the price is 2% above a previous low. The market hits a new low on July 21, but the price on July 25 is not 2% higher. So we continue to short the $. On September 1, 1986, the market hits another low (2.022), so we begin looking for a price that is 2% higher (2.062 = 1.02 x 2.022). This occurs on September 8 where the price is 2.076 DM/$. We buy back $ at a price of 2.076 DM/$.

    (c) Profit has three components: (1) Gain on transaction = 2.150/2.076 = 1.036 => 3.6%. (2) Transaction costs = 2 x 0.02% = 0.04%. (3) Interest paid from short $ / long DM position at 2.5% per year for 55 days = 0.40%. Total =  3.6% - 0.04% - 0.40% = 3.16% in 55 days.

  • p. 388 - In Table 11.5, there are two errors in the third from the last line ofthe table. The contract size for the LIFFE long-gilt contract should be £100,000 and the minimum price change allowed is 0.01. In some cases, the exchange permits smaller minimum price changes for near term contracts. See the exchange web sites for further information on current contract specifiations.
  • p. 390 - In the fifth line from the top, the Eurodollar futures price should be 92.86, corresponding to a 7.14 percent per annum interest rate. The 92.36 figure is a typographical error.
  • p. 430 - Five lines from the bottom, the final sentence in that paragraph should read: "Thus, strike prices greater than 100 imply a higher yield than the notional bond, while strike prices less than than 100 imply a lower yield than the notional bond." The logic is that say for the 10-year Treasury Bond, the notional instrument has a 6% yield. With the 10-year Treasury yield now at about 5%, speculators are paying more than par for a futures contract designed to deliver an instument with a notional 6% yield. Visit the CBOT site at,3181,1413,00.html and observe that (as of July 22, 2006) the 10-year Treasury futures is trading at about 105. Click on the red "Omega" symbol to see the options, which have strike prices at about the same levels.
  • p. 434 - Footnote 14 contains an error. It should refer to equation 12.7a. There is no equation 12.10a in the text.
  • p. 527 - In the last line on this page, the denominator of the second expression should be "B^t+1 Ft" .
  • p. 528 - In the first lines that include equation (14.5), the "F" in the denoinator should have a subscript "t"
  • Inside front cover - The correct link for the International Swap Dealers Association is

Richard M. Levich  |  Tel: (212) 998-0422  |  Fax: (212) 995-4220  |  E-mail:
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