year? When should we use which basis? Is there a clearcut answer or we just go by our luck? The difference can be significant when we deal with compounded (exponential) rates…
Libor = 360 day, don’t compound (typically on swaps and FRA’s) everything else = 365, and compound (futures, forwards, options)
360 day is mostly used for simple interest rates(non-compounding) such as bank deposits(CD, LIBOR based rate) and LIBOR based payments(maybe swaps, FRA etc.) 365 is used for equity, bonds, and contracts based on these. Also, index contracts. Currency valuations are 365 based, unless otherwise noted.
Not positive on this, and if I am wrong please correct me, but I wrote this down today: swaps = 360 forwards = 365 futures 365
CFARhythm base it on the rate used. Simple compounding=360 days, Compounding=365 days. Swaps are usually 360 because many are based on LIBOR payments. But sometimes they are 365(think equity swaps or maybe fixed for fixed rate swaps, etc.). Forwards and Futures are mostly 365. I find it easiest to understand by concentrating on the underlying investment (bond, stock, LIBOR) payment etc. and then determine what interest rate we are using. Basically anything that is not LIBOR based is 365.