I am trying to analyze an investment strategy that tries to exploit the empirical difference between forward interest rates and realized spot rates. I am using FRAs to capture the difference.

I am looking at different contracts, namely 3x6, 6x9, 9x12, 12x24, 24x36.

Every month from 01/01/1980 to 02/01/2013 a short FRA position is entered.

Now I want to compare all the contracts in terms of average return p.a., standard deviation p.a., Sharpe ratio, etc.

My problem is that I don't know how to make the returns from the 3-months contracts comparable to the ones from the 1-year contracts (which should give me returns p.a. already?).

Since I am using only FRAs, all the returns are excess returns; I have no capital to start with. I just enter an FRA with notional 100 every month.

Can anybody help me?

  • $\begingroup$ Make a total return series that would invest in your strategy and then calculate the standard deviation/Sharpe from that. $\endgroup$
    – John
    Jun 3, 2013 at 15:41
  • $\begingroup$ I don't think you can make them truly comparable. You could annualize the returns, but this would hardly be comparing apples to apples since you would be assuming a yield curve with identical characteristics and rates existing at times they obviously didn't. Not to mention you would be assuming multiple curves existed simultaneously on the same underlying using this method to compare a 3x6 to a 6x9. $\endgroup$
    – jeff m
    Jun 3, 2013 at 16:03


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