Forward rates

You need to estimate the 8 month forward rate and you do it by approximating between the 4 month and 12 month forward rates. There are 8 months between 4 months and 12 months, so we assume that the change each month is (1.8045 - 1.7819) / 8 To get that 8 month forward rate, we take the 4 month forward rate and then add on the extra 4 months and the change per month just calculated. So the 8 month forward rate = 1.7819 + 4 x ((1.8045 - 1.7819)/8) = 1.7932 (Alternatively, and quicker for this particular question, since 8 months is half way between 4 months and 12 months, we can take half way between the 2 forward rates. (1.7819 + 1.8045) / 2 = 1.7932. However, had it been (for example) a 7 month forward rate that we needed, then you would need to do it the first way.) Having got the forward rate, you then use it in the normal way as I explain in my free lectures.

Thank you very much

You are welcome :-)