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Related to Mock Exam A, Afternoon Session - Derivatives "Madafi Case scenario"

Hello, 

I have a doubt related to the question number 48 in the  Mock Exam A  afternoon session “Madafi Case scenario”, Equity Swap Contract, the solution says the following:

A is correct. The quarterly interest rate is calculated as [(1 + 3.2%)^(1/4)] – 1 = 0.0079, so the fixed cash flow Ndlovu receives is ZAR5,000,000 × 0.0079 = ZAR39,528.77 ….

My doubt is: Shouldn’t the 3.2% (the fixed rate) be multiple by * 90/360 (because that is the convention) instead of ^(1/4)?  0.008 

Thank you very much in advance for your help.

Gabriel

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This is a question I’ve asked myself many times.  In spite of Schweser’s advice on when to use which approach for interest rates (divide or extract root), I’ve found myself in contradiction with what I had memorized.

That said, you’ll answer question 48 correctly using either approach.  The difference isn’t huge.

Vincit qui se vincit. Publilius Syrus

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