Hi folks,

Here is the question which puzzles me:

I understand the methodology, but why are the forward rates used to calculate the coupon payment?

Thanks in advance, folks.

Hi folks,

Here is the question which puzzles me:

I understand the methodology, but why are the forward rates used to calculate the coupon payment?

Thanks in advance, folks.

It is a floating rate note set in areas.

So for example the rate now = coupon period 1; rate period 1 = coupon period 2

Pricing of derivatives – futures, forwards, options, swaps, whatever – is based on exactly one premise: preventing arbitrage.

The forward rates are the one-period rates that prevent arbitrage.

Nobody thinks that they’ll come to pass. But that’s not the point. Preventing arbitrage is the point.

My pleasure.