While estimating the FRA (derivatives) the author uses the underlined equation in image 1.

Image 1

why cant we use the equation in Image 2?

Image 2

**What is the difference?**

Image 1 from MM videos

Image 2 from CFAI book

While estimating the FRA (derivatives) the author uses the underlined equation in image 1.

Image 1

why cant we use the equation in Image 2?

Image 2

**What is the difference?**

Image 1 from MM videos

Image 2 from CFAI book

Method in Image 1 (simple interest) is usually used when the rates are LIBOR based.

Method in Image 2 (compound interest) is usually used if they describe the rates as risk-free rates or spot rates.

Thanks for the reply

Specifically, the second uses effective rates.

I don’t recall seeing effective rates used for FRAs in the CFA curriculum. Furthermore, the differences in the resulting calculations are small, so you will likely get the same (closest-to) answer either way.