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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_. |
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