2 questions, both relatively simple. So if we are trying to calculate the price of a 1x4 FRA when the current 30 day LIBOR is 4% and the 120 day LIBOR is 5%, we calculate the actual rate on a 90 day loan from day 30 to day 120 by 1+R120/ 1+ R30 = which gives us 5.32%. What the heck is this 5.32%? What does it mean. I’m trying to wrap my head around this concept since you need it to price the FRA but really can’t conceptually think of it other than its the rate on a 90 day loan from day 30 to 120. And I’m just pulling that directly from Schweser.
Secondly, the likely variation we’ll get is pricing that same FRA 10 days in. In Schweser they discount the value back 110 days, while when we were just valuing the 1x4 we discounted it back only 90 days to when the contract starts. Many thanks to whoever can help. Let’s all get through this.