Anyone else notice the formula for the FRA price looks rather suspect on the flashcards? It's missing either: a) to say R_K has compounding frequency T2 - T1 or b) change L(1 + R_K) to L(1 + R_K)^(T2-T1)
The formula stated on the flashcard implicitly assumes that R(K) is an effective interest rate over the length of time period T2 - T1. More generally, if we wish to allow for the possibility that R(K) is quoted per annum, but T2 - T1 is not a one-year time interval, then the numerator in the second term on the right-hand side should really be: L [1 + R(K) (T2 - T1) ] eg if R(K) is 6% pa convertible half-yearly and T2 - T1 = 0.5 years, then: R(K) (T2 - T1) = 0.06 * 0.5 = 0.03 corresponding to an effective interest rate of 3% per half-year. I am currently updating the Flashcards and will make sure that this change is incorporated. Thanks for highlighting the issue. NB This is on Flashcard 4 of Chapter 11.
