Fx and derivatives formula

[data storm]

Hi all
hope that you all are doing great with the final days before the exam.
I, sometimes get confused when practicing the derivatives or economics regarding the rates that should be compounded and the ones that shouldn’t.
i mean you may encounter a question asking about the currency forward contract price in derivatives or the uncovered interest rate parity or the Forward rate agreement and so, my question is when should i say for ex. its (1+(0.07*270/360) and when should i do it life (1+ 0.07 ) ^ 270/360
is there a one rule or thing to be a spontenous reminder whenever i see this questions?
thanks!

 

[bfry]

I always use simple interest for FRAs and rate products. Everything else I compound.
In either case the results shouldn’t be too far off - I would think we would get close to the correct answer either way on the exam if they are not specific on which to use. I think the objective is to test our knowledge of the actual concept - not weather we remembered to use simple or compound interest.

 

[S2000magician]

FRAs and swaps are generally based on LIBOR; LIBOR is quoted as a nominal rate, not an effective rate.

 

[data storm]

okay, bfry good point, but yeah they’re sometimes too sneaky to put the chocies close enough so that you will see each one of them, the compound interest way and the simple interest way.
thanks

 

[data storm]

Hi Bill
sorry i can’t get that. and what about the currencies?