标题: why different compounding methods in derivatives vs. rest of the curriculum? [打印本页] 作者: manchester88 时间: 2011-7-11 17:40 标题: why different compounding methods in derivatives vs. rest of the curriculum?
hi guys,
lets say:
T= 90days with act/360
r= 5% p.a.
in most of the problems involving interest throughout the curriculum (e.g. in CF and FI) we used a method like this:
FACE / (1+r*90/360)
in the derivatives section this apparently would become
FACE / (1+r)^(90/360)
which is not the same.
when we would be using continous compounding, like we were actually supposed to do, we'd be calculating FACE*exp(-r*90/360) and not FACE*exp(-r^(90/360)).
why are we changing "methods"?
cheers
Edited 4 time(s). Last edit at Tuesday, March 16, 2010 at 05:50PM by chefe_.作者: manasib 时间: 2011-7-11 17:40
LIBOR is an annualized discount rate based on simple interest. When working with LIBOR-based instuments (i.e floating rate loans, FRAs, interest rate options, caps and floors) unnualize by multiplying the LIBOR rate by t/360.
To find the PV or to calculate fixed-rate bond yeilds use (1+r)^t/360作者: ishfaque 时间: 2011-7-11 17:40
hi! thx for your answer.
but, actually when doing FI calcs with our TI-BA II, to find the PV of a level-coupon bond for example we're doing the following.
say we have a bond with quarerly coupon PMTs @ r% p.a.
N=T*4
I/Y=r/4
which is actually PV= .... + (FACE+coupon) / (1+r/4)^N
with 1/4 = 90/360
--> PV= ... + (FACE+coupon) / (1+r*90/360)^N
which should conceptually not be different from my earlier post.
i think it's starting to mess with my head :/
Edited 1 time(s). Last edit at Tuesday, March 16, 2010 at 07:57PM by chefe_.作者: agulani 时间: 2011-7-11 17:40
ok... e.g. schweser #5, page 206 or cfai #6, page 103 -> upper/lower bounds for options
min european put value = max[X/(1+r)^(T-t)-S0,0]
with T=4months=4/12years -> max[X/(1+r)^.25-S0,0]
since in this 4months there is no compound interest, i dont understand why we're not doing this: max[X/(1+r*.25)-S0,0]
