In the Schweser section on valuation of the various types of futures they use 3 different adjustments for time. For instance if the risk free rate is 5.00% and period is 90 days I have seen them use the following without any explanation regarding which method to use: 1. 1 + .05(90/360) = 1.012500 2. 1.05^(90/360) = 1.012272 3. exp(.05*(90/360)) = 1.012578 Does anyone know the rules of when to apply one method versus another?
I’m confused by exactly the same thing. What I reckoned is when the rate is LIBOR, use 1; for other interest rates, use 2; continuous, use 3. Am I right?
Just a guess: 1. This is for FRA’s since it’s an add on rate 2. Normal future value 3. For continuous compounding. You would see this on something like equity index futures with a dividend. This would be specified in the question T/G
this is a good question, something i should have thought about before. why do we sometimes just multiply 90/365 and other times take it to ^90/365 i never really thougt about that but did it automatically.
I verified on some problems that the results using 1 and 2 are actually very close.
Trader/God’s answer is pretty good here. #2 is daily compounding for 90 days.