Inferring the Forward Curve
Suppose that you do not have access to a term structure model or the requisite adjustment to the futures rates. You still can infer the LIBOR forward curve if you observe the fixed rates on plain vanilla interest rate swaps. For example, suppose that you know the current level of 3-month LIBOR is 0.50% and that the fixed rates on 1-year and 2-year swaps are 2.12% and 3.40%. These swaps are for quarterly settlements and 30/360 day-counts. Suppose further that you observe the full range for the intermediate-maturity swaps: The 0.50-year fixed rate is 1.04%, the 0.75-year is 1.58%, the 1.25-year is 2.44%, the 1.50-year is 2.76%, and the 1.75-year is 3.08%.
Okay, it is incredibly unrealistic that you could observe all ...
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