Hi, In Economics they say that Ft = So x ( (1+ra x (Days/365)) / (1+rb x (Days/365)).
And in Derivatives they say: Ft = So x ( (1+ra ^ (Days/365)) / (1+rb ^ (Days/365)).
They do give different answers. Am I missing something here?
Thanks for the input!
In Econ they assume that the risk-free rates are quoted as nominal rates.
In Derivatives they assume that the risk-free rates are quoted as effective rates.
That’s the only difference.
As far as I know there are different conventions. FRAs and Swaps for example are generally expressed with the x (Days/360) instead of raising to the power of. Hence, one method takes compounding into account and the other does not. As periods are usually small, effect is negligible.