Currency Forwards in Econ vs Derivatives

CFA Level II Derivatives
#1

So I’m on the derivatives section… and run into the valuing of a currency forward after initiation.

The formula looks really familiar: V = [(FP_t - FP) x Contract Size] / (1 + r)T-t where T is 365 days

The formula from the econ section used simple math and 360 day convention: V = [(FP_t - FP) x Contract Size] / (1 + r(days/360))

Does that mean if the question comes up on the econ section, use 360 days with simple interest and if it comes up in derivatives use 365 days with compounding?

#2

The difference in output may be material only with very large amounts. I mean, the first one is more correct. As I recall, the second one was used only with some currency FX derivatives.

#3

Yes.

The Econ formula assumes LIBOR (nominal interest), while the derivatives formula assumes effective interest.