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Dear Sir,
Can you please tell me how is the pre-paid forward rate calculated in this question?
Thank you.
It is the forward rate multiplied by the discount factor (so for year 1, 0.8326 x 0.9973).
I really would not bother with this question – it was set by the previous examiner (and is one of the reasons he is no longer the examiner). The current examiner started in 2010 and you are better to spend your time on the current examiners questions.
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