 # forward price, pls help.

sorry i can’t post question on CFA Level II, so i can only post my question here. when we calculate forward price, we have the formula:- F=S x ( 1+r ) ^ T, e.g. F=100 x (1+0.5)^(30/360) my question is that, why don’t we calculate by following formula:- F= S x (1 x ( r x 30/360))??? when do we use (1+r)^(30/360) and when will we use (1+ (r * 30/360)). thank first.

Does the question tell you what sort of rate r is? (1+r)^(30/360) uses an annual rate. 1+ (r * 30/360) uses a monthly compounded rate.

francis0423 Wrote: ------------------------------------------------------- > sorry i can’t post question on CFA Level II, so i > can only post my question here. > > when we calculate forward price, we have the > formula:- > > F=S x ( 1+r ) ^ T, e.g. F=100 x (1+0.5)^(30/360) > > my question is that, why don’t we calculate by > following formula:- > > F= S x (1 x ( r x 30/360))??? > > when do we use (1+r)^(30/360) and when will we use > (1+ (r * 30/360)). > > thank first. Are you using LIBOR or not? That will answer your query.

if using LIBOR, we must use (1+r)^(30/360)? sorry for i don’t know the reason.

francis0423 Wrote: ------------------------------------------------------- > if using LIBOR, we must use (1+r)^(30/360)? sorry > for i don’t know the reason. http://www.analystforum.com/phorums/read.php?13,1233347,1233395#msg-1233395

idreesz Wrote: ------------------------------------------------------- > francis0423 Wrote: > -------------------------------------------------- > ----- > > if using LIBOR, we must use (1+r)^(30/360)? > sorry > > for i don’t know the reason. > > http://www.analystforum.com/phorums/read.php?13,12 > 33347,1233395#msg-1233395 The 2 posts have contrary conclusions. Which shall be correct ? For LIBOR, [1+rx(60/360)] or (1+r)^(60/360) ?

AMA Wrote: ------------------------------------------------------- > idreesz Wrote: > -------------------------------------------------- > ----- > > francis0423 Wrote: > > > -------------------------------------------------- > > > ----- > > > if using LIBOR, we must use (1+r)^(30/360)? > > sorry > > > for i don’t know the reason. > > > > > http://www.analystforum.com/phorums/read.php?13,12 > > > 33347,1233395#msg-1233395 > > The 2 posts have contrary conclusions. Which shall > be correct ? > For LIBOR, [1+rx(60/360)] or (1+r)^(60/360) ? I totally read this wrong. Please ignore my answers.

idreesz Wrote: ------------------------------------------------------- > francis0423 Wrote: > -------------------------------------------------- > ----- > > if using LIBOR, we must use (1+r)^(30/360)? > sorry > > for i don’t know the reason. > > http://www.analystforum.com/phorums/read.php?13,12 > 33347,1233395#msg-1233395 if for 1 year basis, two formula have the same answer 100 x (1+5%)= 105 100 x (1.05)^1=105 why do they have the same answer for a year?

francis0423 Wrote: ------------------------------------------------------- > sorry i can’t post question on CFA Level II, so i > can only post my question here. > > when we calculate forward price, we have the > formula:- > > F=S x ( 1+r ) ^ T, e.g. F=100 x (1+0.5)^(30/360) > > my question is that, why don’t we calculate by > following formula:- > > F= S x (1 x ( r x 30/360))??? > > when do we use (1+r)^(30/360) and when will we use > (1+ (r * 30/360)). > > thank first. (1+ (r * 30/360)) is wrong because it is calculating amount as per simple interest. For 10 years the interest would be 10r, using this. I assume there has to be compouding - daily, monthly or yearly. (1+r)^(30/360) is using monthly compounding.