medium · FRM Part 1
In the context of interest rate derivatives, why must a forward rate extracted from the spot curve be adjusted when comparing it to a rate implied by a short-term rate futures contract?
- Futures rates are calculated using simple interest while FRAs always use continuous compounding.
- Futures contracts are exchange-traded and therefore lack the counterparty risk premium present in FRAs.
- The accrual conventions for futures (Actual/360) differ from the continuous compounding used in zero-rate curves.
- Daily marking to market of futures introduces a convexity advantage for the long-rate position.
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