Forward Rates

CFA Level I
#1

Using the following information: Spot Rates 1 year = 10% 2 year = 11% 3 year = 12% Calculate the 2 year forward rate one year from now? A) 11% B) 12% C) 13% D) 14%

#2

D (1+3yr spot)^3 / (1+2yr spot)^2 - 1 = 2-year forward one year from now 1.12^3 / 1.11^2 - 1 = 1.4049 / 1.2321 - 1 = .14027 = 14%

#3

C? (1.12)^3 = 1.10 * (1+X)^2 X = 13%

#4

(1+r3)^3 = (1+r2)^2 * (1+2f1)^1 1.12^3 = 1.11^2 * (1+2f1) 2f1 = 1.12^3 / 1.11^2 - 1 = 14.27%

#5

i agree with delhirocks. the answer is C.

#6

(1 + s3)^3 = (1 + s2)^2 * (1 + 2f1) 1.404928 = 1.2321* (1 + 2f1) 2f1 = 1.14027 - 1 = 14.027% - Dinesh S

#7

Agree with delhirocks and maratikus with C.

#8

dinesh.sundrani Wrote: ------------------------------------------------------- > (1 + s3)^3 = (1 + s2)^2 * (1 + 2f1) > 1.404928 = 1.2321* (1 + 2f1) > 2f1 = 1.14027 - 1 = 14.027% > > - Dinesh S Sorry guys, I have still not recovered …I misread the question completely … the answer should be FOR SURE 13.01% (1 + s3)^3 = (1 + s1) * (1 + 2f1)^2 (1.12)^3 = (1.10)(1 + 2f1)^2 1.2772 = (1+2f1)^2 (1+2f1) = 1.130135 2f1 = 1.130135 - 1 = 0.130135 = 13.0135% - Dinesh S (1 + s3)^3 = (1 + s2)^2 * (1 + 2f1) 1.404928 = 1.2321* (1 + 2f1) 2f1 = 1.14027 - 1 = 14.027% - Dinesh S

#9

Hey guys, C is correct for the reasons dinesh came up with.

#10

NM

#11

Ok I’m a bit confused. What is the difference between this type and the one where you plug in a similar equation but the variable is in a different spot. For example: > The current 4-year spot rate is 4% and the > current 5-year spot rate is 5.5%. What is the > 1-year forward rate in 4 years? > > A. 8.62% > B. 9.58% > C. 10.14% > D. 11.72% Five year rate=4 year rate * 1 year forward 4 years from now (1.055)^5=(1.04)^4 * (1+x) X=.117195

#12

There was another spot-forward question discussed earlier today–with a thread started by lola. Look that up. That had a similar example and barthezz had drawn it out… Look at that, then come back to look at this one. Hope that helps. CP

#13

Curses! They didnt teach about 2yr forwards in the SS notes. All they teach us is the 1 year forward rates! I would have guessed D also… doh!

#14

I read lola’s thread from yesterday and still can’t get my arms around this. I can get the questions that stogart is referring to, but the whole Spot and BEY thing is throwing me off. I always approach these by “setting up the f” Example: 4F1 equals one year forward rate in four years {(1+r5)/(1+r4)}-1 = rate can someone break this down using the same technique?

#15

I think it just clicked… you would normally set this up as 2f1, but instead you set it up as 2f4 (you double each side and then reverse their location next to the f) so, {{(1+ 3 year spot/2)^6/( 1+ 1 year spot/2)^2)} square root of 4 } -1 } x 2

#16

so, is the answer is C? I dont remember schweser teaching us 2F1 that well, although I certainly remember it in Book 6…i’m looking back through my notes now.