 # Forwards

One year spot rate 10% Two years spot rate 11% Three years spot rate 12% Based on the data, the 2 year forward rate one year from now is closest to A. 11% B. 12% C. 13% D. 14%

b

My answer is D, but schweser answer is C here is my calculation (1+s3)^3 = (1+s2)^2 * (1+1f2) solving for 1f2 = 14%

Should be: (1+s3)^3 = (1+s1) * (1+1f2)^2

It asks for the 2 year forward rate 1 year from now, not the 1 year forward rate 2 years from now…tricky

the answer is C, 13% 1.12(3) / 1.1, and take the square root of that

is it C? I think that might be it

nice yancey thats what I just did

These questions always help out if you draw a quick time line diagram. It helps to visualize how to solve it to make sure you are using the right forward rates.

thanks a lot …

Has to be C! 1.1*a = 1.11^2 get a = 1.12 >>> 12% is one year forward rate one year from now. now, 1.1*1.12*b = 1.12^3 get b = 1.14 >>> 14% is one year forward rate two years from now. Now, 1.12*1.14 = 1.2768 = c^2 get c = 1.12995 ~ 1.13 >>> 13% is the two year forward rate one year from now!

Solution is : 1.05^2 *(1+f)^4 = (1.06^6) Multiply f by 2 to get 13.0071%