Hi guys - when pricing and valuing forward contracts the CFAI book will sometimes calculate a 3-month future price as (1+r)^0.25 and other times as 1+(r*0.25). These give similar but slightly different results. Is there any practical difference for the exam and how do you know when to use which method? Thanks
It depends on the nature of the floating rate. If it’s LIBOR, then it’s a nominal rate; use the second formula. If it’s an effective rate, use the first formula.
As a practical matter, there’s no material difference in the results. But the vignette should let you know whether the rates given are nominal or effective.
Got it - thanks!
My pleasure.