Can you please set the record straight for me. When do I use the 360 day convention vs. the 365? - When pricing forwards? -When valuing forwards? - Pricing & valuation of equity forwards? - Put/Call Parity -FRA’s -Swaps? I was under the assumption to use 365 for Forward, Futures, and Put/Call parity, then I discovered I got those same questions wrong on the Mock due my use of the 365 days convention instead of 360. Can someone please clarify for me, thanks in advance!
Ok here’s my take, and pleasae feel free to corect me if im wrong… 1) Forwards (not the question might say 3 months instead of days, so it would be 3/12 or 1/4 instead of days) -Equity - Use 365 days (whether you are pricing or valuing). Compunding interest (ie we raise it days/365) -Bonds - Use 365 days. Also compounding interest. -FRAs - use 360 days, simple interest (we multiply by dyas/360, we dont raise it to that power) -Currency forwards - we use 365, compounding 2) Options -Put call parity - we use 365 days, compounding interest 3) Swaps - a little trickier because of the convention to use the Z values -we use 360 days to find the fixed rate or the price of the swap -we use 360 days when annualizing and unnanualizing rates (so if the 90 day rate is 4%, we unnanualize as 4% * 90/360) 4) Swaptions -USe 360 days, simple interest 5) Caps and Floors -use 360 days, simple interest Did i get it all?
Thanks spanishesk…I just made a notecard out of that. I’ll check back to this thread for errata.
Remember that LIBOR is based on 360 days. Anything LIBOR related should use 360 days. Hope that helps.
360 for Zero Coupon Bond, FRA, Swaps 365 for Coupon Bonds, Currency, Options, Equity
well t-bills are also on a 360 day basis. So, all the x-rate stuff in economics (bid-ask spreads and interet rate parity) is on a 360 day basis too.
Thanks for the input everyone! I posted this question because I noticed that in the p.m. mock for CFAi, they used a 360 day convention in Q’s 7 & 8. Of course, I got those Q’s wrong! Anyone care to comment on that?
Just use 360 for them all. I notice in the answers that they are very close anyway. They can’t be too close because different rounding decimals will give different answers.
there are 7 elements have tow parts: 360 just 3 swap zero coupon FRA , 365 bonds with coupons equity currancy index
bump, this thread is gold