flash quiz Market risk Round 2 question 4

[phwdisse]

Dear David,

In de quiz on Market Risk there's question 4. In this question we have to calculate the forward rate for a Euro Dollar future contract with convexity adjustment. I'm missing the step for annual compounding to continuous compounding.
"This corresponds to 8.031% with continuous compounding and an actual/365 day count."

If 8% is annual compounding with four periods then with continuous compounding the annual interest would be 7,92%

e^7,92%= (1+8%/4)^4

What's my mistake.

Regards,

Paul

 

[David Harper CFA FRM]

Hi Paul,

I don't think you are mistaken. See this from Ravi.

Here is the underlying worksheet for this question.

Mine follows Hull's example 6.3, where along with the compound frequency conversion, he translates from actual/360 (which is the Eurodollar day count basis) to actual/actual day count basis. However, I do *not* think this is particularly material; I think your solution is good too.

Thanks, David