Assuming the 92-day and 274 day interest rate is 8% (act/360, money market yield) compute the 182- day forward rate starting in 92 days (act/360, money market yield).





Answer provided is 7.20%.

I don't understand the term act/360 given in this question. What is its meaning? How is this computation made? To answer this question, study of which topic in quantitative finance is necessary?

In my opinion, this question is useful for testing the financeIQ of the readers of this "Quantitative Finance stack exchange". Isn't it?


Daycount conventions are rather a technical topic that does not test anyone’s ‘finance IQ’. Moreover, the readers of the site aren’t here to be tested, we are here to help those that wish to learn (site moderator can more clearly opine).

To answer your question, Act/360 is a daycount convention whereby the actual amount of interest paid equals the interest rate times a fraction equal to (number of days in the interest accrual period)/360. So in the question, if the forward rate to be found is $f$, we must have that a dollar invested for 92 days at 8pct, with the proceeds reinvested at the forward rate for 182 days, must give the same amount as investing for 274 days at 8pct. Thus, $$(1+0.08(92/360))(1+f(182/360))=(1+0.08(274/360))$$. Hence $ f=7.84pct $ which does not exactly match any of your answers.


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