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Dear Sirs,
Could you please help me to understand how discount factor is calculated in currency swaps example with fixed payments for 6 months and variable spot rates and variable %.
In the study hub they show interest for the second month as 4,38%*2/12 = 0,73%
But then for DF calculation they do 1/1,0073.
I wonder why is not 1/(1,0073*1,073)?
What is the overall logic in those tasks? (Study hub 14.3.5. Activity 9)
Thank you!
The interest for the 2 month period is 0.73% and so to discount for the 2 months the factor is 1/1.0073
It would only be 1/ (1.0073 x 1.0073) had 0.73% been the monthly interest rate, but that is not the case – it is the 2 monthly rate.
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