why different compounding methods in derivatives vs. rest of the curriculum? actually, different, why, involving

manchester88

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_.