Suppose the 1-year spot rate is 6% and the 2-year spot rate is 7.5%. the one year forward rate: I calculate it s: 1.075^2/1.06 - 1= 9.02% but i saw some times solution gives: 7.5%+7.5%-6%=9% which way should we stick to?Thanks.
stick to the first method: (1+2 year spot)^2 = (1+1yr)*(1+1f rate)
hw0799 Wrote: ------------------------------------------------------- > Suppose the 1-year > spot rate is 6% and the 2-year spot rate is 7.5%. > > the one year forward rate: > > I calculate it s: > 1.075^2/1.06 - 1= 9.02% > > but i saw some times solution gives: > 7.5%+7.5%-6%=9% > > which way should we stick to?Thanks. The first solution is the correct one. The second only gives you an approximation.