FRA

CFA Level II Derivatives
#1

When calculating value of an FRA at maturity, after calculating the interest savings, we discount the amount. We use the current interest rates but we adjust it by the number of month the contract is active in, i.e we multiply by 90/360 if the contract is 1x4.

My question is why do we adjust the interest rate when we are discounting?

#2

Interest rates are always – _ always! _ – quoted as annual rates.

If the loan period is only 3 months, then you don’t earn a year’s worth of interest; you earn only ¼ (= 90/360) of a year’s worth of interest.

#3

Thanks! You made it an easy cake :smiley:

#4

And a tasty one, I hope.