APPENDIX TO CHAPTER 12Short‐Term Rates and Their Derivatives
This appendix builds on Appendixes A11.2 and A11.3 to explain the pricing of forward and futures rates and the futures‐forward rate difference in term structure models. All expectations here are also with respect to some risk‐neutral or pricing probabilities.
The first step in this Appendix is to show that the futures rate with respect to a term rate, like a Euribor futures rate in the text, is greater than the corresponding forward term rate.
The 
‐year rate, 
years forward, 
, is the rate that equates the present value at time 
of receiving a unit of currency at time 
with the price of a 
‐year zero coupon bond, 
‐years forward, 
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