Consider the following yield curve of zero-coupon instruments:
Term Yield (per cent)
6 months 7.5
12 months 7.9
2 years 8.4
3 years 8.7
Calculate the 6-month continuously compounded forward rates for periods starting six months hence.
Solution to Problem 3.13
e 6-month forward rate six months from today is calculated as:
tm
mt
f
rmrt
mt
=
−
−
00
()()
=
01005
105
105
rr()(.)
.
.
−
−
=
00791007505
105
...
.
×−×
−
= 8.3%
3.8.2 Why Implied Forward Rates?
In a forward contract, we try to x the price of an asset to be traded in the future at the current time.
However, at the current time, we
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