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we need to calculation a forward rate for 5m but only 3m and 1yr forward rates are given.how should we go about calculating the correct rate.
As an estimate, you take the 3m rate and then add 2/9 times the difference between the 3m and 1 year rates. (2 because 5m-3m=2m; 9 because 1yr – 3m = 9m)
Why then in the exam kit answers does it take the 3month forward rate x 7/9 and the 1 year forward rate x 2/9??
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Sir can u plz correct me where I am going wrong??!!
3mnths= 1.9066 – 1.9120
1yr= 1.8901 – 1.8945as per ur explanation.
1.9066+ (2/9 * (1.9066-1.8901)) = 1.9103
actual ans – 1.9029
🙁
Mrsarij: Why are you adding to 1.9066?
The 1 year forward rate is lower than the 3 month forward rate, and so the 5 month forward rate will be lower as well!
You should be subtracting from 1.9066 and then you will get 1.9029
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