this should be a quick one guys - I’m working through the formulas for pricing and valuing forward contracts. Can someone please claify the convention for number of days in a year?
My current understanding is that fixed income and equity forwards use a 365 day year, while foward rate agreements and currency forwards use a 360 day year. Is that correct? Why aren’t they all the same - either 365 or 360?
They’re based on the day convention for the underlying interest rates that they’re using. T-notes and T-bonds use 365-day years, so forwards based on those – fixed income and equity forwards, for example – will use 365-day years, but LIBOR uses 360-day years, so forwards based on LIBOR – FRAs and currency forwards – use 360-day years.
There’s no reason that they cannot all be the same; all you have to do is go talk to the US Treasury or the LIBOR folks and get one of them to change their convention. Easy-peasy.
Thanks for the help. i’ll get right on that.
My pleasure.
Keep us posted on your progress.