Dear all,
I am confused with some terminologies as follows:
Ex: we have 1 year spot rate = R1 and 2 year spot rate = R2, then calculate 1 year forward rate 1 year from today = 1F1
We have the following terms:
Expected spot rate = future spot rate = 1 year- spot rate in 1 years = 1F1
Please advise if i am wrong
Thanks all
Under pure expectations theory (one of the theories used to explain the shape of the yield curve), the expected (future) 1-year spot rate one year from today is (today’s) 1f1. Other yield curve theories would likely have different expected values.
The expected (future) spot rate is what we expect today. The future spot rate is what the rate actually is one year from today; they’re not necessarily equal (and, in fact, almost certainly not equal).