Forward Contract

This topic has 3 replies, 2 voices, and was last updated 6 years ago by John Moffat.

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October 31, 2019 at 8:54 am #551277
rohanmehta
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In one of the que of kaplan exam kit

3month forward rate is 1.9066-1.9120
12month forward rate is 1.8901-1.8945

How to find 5 month forward rate from this info?
October 31, 2019 at 8:58 am #551279
John Moffat
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You apportion between 3 months and 12 months.

So you take the 3 months rate and then for the extra 2 months you subtract 2/9 of the different between the 3 month and 12 month rate.
October 31, 2019 at 9:06 am #551280
rohanmehta
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Sir, why do we substract for extra 2 months?
Shouldn’t we add the 2 month rate(after finding 9month rate and dividing that rate by 9, giving us per month rate, and multiplying 2month to it )
to the 3 month rate to find 5 month rate

Is it because the forward rate decreases and no. Of months increases, that we substract?
November 1, 2019 at 9:11 am #551343
John Moffat
Keymaster
- Topics: 57
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It is as you say but because the 12 month rate is lower than the 3 month rate, the 5 month rate must be lower than the 3 month rate also.

If the 12 month rate was higher then the 5 month rate would be higher and we would then add and not subtract.
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