ERP calculation for supply side based on Ibbotson-Chen model

Any way of understanding this formula?

I am looking at it from different perspectives but it really killing me.

I cant retain this piece of information.

Let me tell ya that the derivation is even more complicated. It is better to memorize this, it will be tested once or not, along with other 50 formulas :l

Alrighty then.

I guess it is going to be plug the numbers in the formula.

Hopefully, I will be able to mug that one up.

Have you seen the FRA valuation formula?

Which one? I dont seem to recall it.


Is there an alternative to not remembering this?

This is actually straight forward.

The intuition is that you find the value per $1 invested.

I simply understood the rational behind it, and it make sense.

So instead of using $1, and then multiplying the result with the notional principal, i just put my Notional Principal in both equation directly, and arrive at the same answer.

Dont get caught up in the formula, its simply, it just look ambiguous

Yes but the notional amount is the least of the problems. The challenge is remembering and applying the appropriate LIBOR rates. There are at least 3 rates with varying maturities that are used.

You have three rates basically, the strike rate, and the mark to market libor floating rate.

Formula = [Notional/(1+{maturing libor}*T-t)] - [{Notional*(1+(strike rate*T-t)}/ (1+(long term libor*T-t)]

You just have to cram it if you can reason through it.

^this formula is exactly logic in fact they like use those fancy schmancy symbols. Olajidean is correct. Practicing EOC and Mock may help to remember an order in formula.