November 17th, 2006, 2:55 pm
Hi,The simple compounding fwd fwd rate between t1, t2 is given by(1/DC) * [DF(t1) / DF(t2) -1](where day count is denoted as DC)Now consider an IR futures contract expiring at t1 into a rate with maturity t2. Assume there is no day to day settlement, no margining .. i.e the trade settles at t1 into the rate until t2Which of the following 2 values of f gives the correct futures prices (100 -f)(1) (1/DC) * [DF(t1) / DF(t2) -1](2) (1/DC) * [1 - DF(t2) / DF(t1)]Documentation for a trading system I have been looking at gives (2), whereas I've always assumed this hypothetical futures contract would be priced using (1)Can anyone shine any light?