When to discount FRAs/Swaps

Hi, I have seen a variety of questions talking about paying a fixed rate and receiving LIBOR (say, 90 day libor).

In some of them, you discount the payoff by (1+libor *days in libor/360). In others you don’t. Under what conditions do you discount?

Also, am I confusing interest rate swaps and forwards?

I believe so, but I’m grey on the subject too. Hopefully someone else can chime in.

I do believe that with swaps, there’s not really any discounting, and forwards are where the discounting comes in. In forwards you discount by the underlying rate at expiration and NOT the forward rate agreed upon initially; which makes sense, b/c the actual period you are discounting is not the period until expiration, but the forward-looking period after expiration.

Because FRAs are settled in advance (i.e., at the beginning of the loan period), the payment is discounted from the end of the loan period back to the beginning.

Swaps are settled in arrears; hence, no discounting.

Forwards and futures are settled in arrears; hence, no discounting.

So, I only discount for FRAs because they are not paid in arrears like swaps are.

So if the question has multiple payment periods, then I don’t discount…



You’re welcome.