Hi John, can you kindly guide me that why have we discounted the forward rates in this question with their relative discount rates? I mean what's the whole point of this question's part (a) , we are already given the forward rates, so why the need for fixed forward rate? And is it how banks quote(set) us their forward rates in practice(or in theory atleast), I mean by discounting the rates of future months at a risk free rate and then dividing by sum of discount factors?
Thanks
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Stone Chippings Importer June 2009
12y ago#1This question is wanting a fixed rate that would apply throughout the whole 6 months. (In a sense it is looking for the 'average' forward rate)
The forward rates given are fixed for conversion in 1 month, another one for conversion in 2 months, and so on.
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