From Schweser, Book 5, page 213: Value a 5.32% 1 X 4 FRA with a principal amount of $1 million 10 days after initiation if 110-day LIBOR is 5.9% and 20-day LIBOR is 5.7%. So, they start with [(1+(.059*110/360))/(1+(.057*20/360))-1]*(360/90). Why do they multiply by 360/90? They say this is finding the “new” FRA rpice on a 90-day loan 20 days from today. -Richard
The new price of the FRA calculated is the unannualized rate, so to annualize it they are multiplying it with the 360/90 [See page 210 to see how a FRA is priced]