LAMMER PLC (JUN 06 ADAPTED)

I am having a problem here. I have the BPP Revision Kit and also all the past exams. However the current edition of the BPP Kit does not contain a question called Lammer, and there was no question called Lammer in the June 2006 exam either. I do know that there used to be a question called Lammer in earlier editions of the Kit (but I don't keep old editions) because I have answered questions about it on here in years gone by. If you use the 'search' button on here and type in 'Lammer' then you will find previous questions that I have answered and hopefully they will explain your problems for you.

Hi there, I found this question in the Kaplan exam kit Lammer Plc (Jun 06)Questions and I cannot understand it either were you able to get a response How did they come up with a 5 month forward rate from a 3 month forward rate 1.9066-1.9120 1 year forward rate 1.8901-1.8945 The estimated fivemonth forward rate is: 1.9029 *7/9 +1.8901 *2/9 =1.9066 Pls explain this calculation part.

As I wrote in my previous reply I only have the BPP Revision Kit and the question Lammer does not appear in the current edition of the BPP Kit (it used to be in their kit several years ago, but since it is such an old question (before the current examiner took over the exam) they have now removed it). However the answer you quote has averaged between the two given forward rates (although you have mistyped in your post and the calculation is (1.9066 x 7/9) + (1.8901 x 2/9) = 1.9029, and this is the 5 month forward rate). A more obvious way of showing it is as follows: The difference between the 3 month and 12 months forward rates is 1.9066 - 1.8901 = 0.0165, and this fall occurs over 12 - 3 = 9 months. We need the 5 months forward rate which is the 3 month forward rate adjusted for an extra 2 months. It is therefore 1.9066 - (2/9 x 0.0165) = 1.9029