caqn someone plz help me with this, its probably very basic for most of you guys. i have the following term structure: Term (in years) cost of funds rate: 0 2.556 0.0833 2.556 0.1667 2.57 0.25 2.588 0.5 2.68 0.75 2.725 1 2.77 then the annual compounding is computed for each term Term Annual Compounding .08333 2.586 .1667 2.598 .25 2.613 .5 2.698 .75 2.734 1 2.770 now we calculate the forward rates for each month in the future until the end of the year: (ie the forward rate from month 1 till end of the year, month 2 till the end of the year, etc.) fwd rate SA A 1 into 11 2.768 2.786817886 2 into 10 2.784 2.803132897 3 into 9 2.802 2.821286405 4 into 8 2.814 2.833481788 5 into 7 2.821 2.841226747 6 into 6 2.822 2.841965275 7 into 5 2.833 2.853183471 8 into 4 2.845 2.865118558 9 into 3 2.856 2.876415123 10 into 2 2.868 2.888505272 11 into 1 2.879 2.900225414 can someone plz explain first of all why do we do the annual compounding and then how do we get the formulas to calculate these forward rates. thx so much. im not sure if this is used in any of the formulas but the annual volatility rate is 22.5%. thx.
This is basic level 1 stuff, no? Check out your stuff on calculating forward rates. And no the vol doesn’t enter into the calculation.
thx joey but i never completed level 1 and dont have any notes on calculating forward rates. is this bootstrapping thats used in this case? if you could just provide me the formula thats used, then that would be greatly appreciated as i can look into it and try to understand it intuitively.
Yes.