![]() In reality, this is a bit more fraught these days - FRAs are not commonly traded for terms longer than 2y, and in this part of the curve the dominant instrument is 3m IR Futures (for the major currencies). ![]() So since your swap consists of a series of Libor fixed rolls, you can reconstruct the float leg value from the FRAs. Where $f(\tau,T)$ is the year fraction of the FRA period, $K$ is the FRA fixed rate, $L(\tau)$ is the appropriate fixing for $\tau$.Ī swap's float leg involves some very similar payments, but the main difference is that they pay just the difference between the rates at the end of the roll rather than the beginning:Īpart from that detail, the exposure from a FRA is equivalent to the exposure from one roll of a floating note, i.e. This is from when that was a good measure of the risk free rate, with the idea that you would receive this and invest at Libor from $\tau$ to $T$. ![]() A FRA from $\tau$ to $T$ pays the difference between the fixed rate and the actual fixing (Libor), discounted from $T$ back to $\tau$ at the Libor rate. ![]()
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