Hull 6.14 exercise

[ammor]

Hi David,

In this question, I didn't understand why did you convert the forward rate from quarterly compounding to continuous compounding. In question 6.13 it was clear because it says (both with actual/365 and continuous) and because Eurodollars are quoted with actual/360 and quarterly compounding, you did the conversion, but in 6.14 I’m quite confused!
Can you please explain why?

 

[David Harper CFA FRM]

Hi ammor,

That's a question from Hull's textbook, i didn't write it. I am not sure, either, why he was compelled to convert to continuous except (i) he does that throughout/habit, or (ii) the final calc is maybe easier to do (?). But i do agree: i see no reason to "exit" quarterly and i would have answered this with:

(((1+4%/4)^(4*300/360)*(1+4.17%/4)^(4*98/360))^(1/(4*398/360))-1)*4 = 4.0419% 398-day zero rate
i.e., quarterly compounding, actual/360 (without any day count conversion)

David

 

[ammor]

Thanks David for your prompt reply.
Now it's clear.


Thanks.