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Estimation of forward rate

Forums › ACCA Forums › ACCA AFM Advanced Financial Management Forums › Estimation of forward rate

  • This topic has 3 replies, 2 voices, and was last updated 10 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • May 28, 2015 at 3:20 pm #249870
    asiunial82
    Member
    • Topics: 2
    • Replies: 2
    • ☆

    Hi. In the question are given: 3 month forward rate ( 1.9066 ) and 1 year forward rate ( 1.8901). We need to use in the question 5 month forward. How to calculated the rate? In the answers it Is done 1.9066 -( 2/9 *(1.9066-1.8901) =1.9029 . I don’t understand this calculation. Please kindly advise.

    May 28, 2015 at 3:46 pm #249892
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54765
    • ☆☆☆☆☆

    It is apportioning between the two.

    Since the difference between the 3 month and the 12 month rates is 1.9066 – 1.8901 = 0.0165, and this is over a period of 9 months (12 – 3). We assume it is falling by 0.0165 / 9 each month.

    We know the 3 months rate, and so the 5 months rate (which is 2 months later) will be lower by 2 x 0.0165/9 = 0.0037

    So the 5 months rate is 1.9066 – 0.0037 = 1.9029

    Hope that makes sense now 🙂

    May 28, 2015 at 4:45 pm #249914
    asiunial82
    Member
    • Topics: 2
    • Replies: 2
    • ☆

    Hi John. Thank You so
    much. Very much apreciated. Joanna

    May 28, 2015 at 8:14 pm #249988
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54765
    • ☆☆☆☆☆

    You are welcome 🙂

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