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Fixed Income Securities, 4th Edition
book

Fixed Income Securities, 4th Edition

by Bruce Tuckman, Angel Serrat
September 2022
Beginner content levelBeginner
560 pages
17h 36m
English
Wiley
Content preview from Fixed Income Securities, 4th Edition

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 beta‐year rate, t years forward, r Subscript t Superscript f w d, is the rate that equates the present value at time t of receiving a unit of currency at time t plus beta with the price of a beta‐year zero coupon bond, t‐years forward, p 0 Superscript f w d Baseline left-parenthesis t right-parenthesis

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