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I do not understand why the answer make use of present values when trying to derive at the forward rate.
Why we are not using the normal formula to derive at discount factors…? What means a continuous time basis…..?
I have told you before that I really would not bother with the last examiners questions – there is no way this would be asked by the current examiner who took over in June 2010.
Usually we discount for yearly intervals. We can if we want discount for monthly intervals or even weekly intervals (it just gets more messy). Continuous discounting is when it is discount for every second 🙂
Again, there is no way the current examiner would ask this, or expect you to use that formula.
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