1 year spot rate is 10%, 2 year spot rate 11%,3 year spot rate 12%. What is the 2-year forward rate one year from now? Answer is 13%. Why? thanks a lot!
(1+10%)*(1+x)^2 = (1+12%)^3
We must have 1.12^3 = 1.1* (1+2-yr forward rate)^2 => (1+2-yr forward rate)^2 = 1.12^3/1.1 => 2-yr fordward rate = 13%
RB beat me by seconds…
search function!!! (1.12^3/1.1)^0.5-1
mirage, this might help as well: http://www.analystforum.com/phorums/read.php?11,635491,635491#msg-635491
JoeyDVivre Wrote: ------------------------------------------------------- > => 2-yr fordward rate = 13% I think Ford actually are paying that now…
The three year rate of 12% tells you that you can invest $$ today and earn 12% compunded for the next 3 years. Invest $100, get $140.47 at the end of three years. If you invest for 1 year, at the end of year 1 you have $110 (10% 1 year spot rate). Then solve for the annualized return you need for the next 2 years on that $110 to have $140.47 and you get 13% EDIT: damn i gotta learn to use more than 2 fingers when I type!
chrismaths Wrote: ------------------------------------------------------- > JoeyDVivre Wrote: > -------------------------------------------------- > ----- > > => 2-yr fordward rate = 13% > > I think Ford actually are paying that now… You think a “ward” is like a receiver? The Ford ward might be a finger-Freudian slip…