FRA for a 6*9 aggrement

CFA Level II
#1

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

Image 1

FRA.PNG
FRA.PNG2080×704 206 KB

why cant we use the equation in Image 2?
Image 2

Forward rate
Forward rate3098×261 40.3 KB

What is the difference?

Image 1 from MM videos
Image 2 from CFAI book

#2

Why didn’t you ask MM on this?

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.

#3

Thanks for the reply

#4

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.