When to Discount with compounding vs using rate given - Derivatives Topic test

[Jsnazz]

The way they present rates in these topic test are super confusing.
In Midway, they give a 3 month, 6 month, and 12 month rate, and they de-annualize them. That is (1+3 month) ^(3/12)
On Moyle, they give you a 30 days and then use that pure, no discounting.
Anyone able to clairfy this?

 

[Gene277]

i do not understand that part as well. why use 0.5% if they are de annualizing them. Shouldn’t they use the 12 month to de-annualize?

 

[T_dot Analyst]

Would like to know as well…some of the topic tests in Deriv they give multiple risk free rates. Sometimes I’m not such which to use, in almost all of the CFAI EOCs you are only given a single annual Risk Free rate.
Should you use the one corresponding with the life of the Forward / instrument?
If there are multiple risk free rates and you had to discount dividends or coupon payments, would you discount each payment by the corresponding risk free rate?

 

[firzenli]

Jsnazz wrote:
The way they present rates in these topic test are super confusing.
In Midway, they give a 3 month, 6 month, and 12 month rate, and they de-annualize them. That is (1+3 month) ^(3/12)
On Moyle, they give you a 30 days and then use that pure, no discounting.
Anyone able to clairfy this?

When they give you a 3-month, 6-month, 12-month rate, or any other rates, one important point is that all those rates are annual rates.
So, for example , if you need to calculate a discount rate for a 3-month period and you were given a 3-month rate, you should know this is a 3-month annual rate, that’s why you have to de-annualized it.
I think these are a little bit about how to calculate an effective rate for a period.

 

[Jsnazz]

What about searcrest? Give us rates, but don’t say they are the consitiously compounded rates already. If you do the LN of them you get the wrong answer. I hope the test isn’t this ambigious.