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Key Financial Market Concepts, 2nd Edition by Bob Steiner

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Forward-forward Interest Rate

Definition

A forward-forward interest rate is the rate for a cash borrowing or lending which starts on one forward date and ends on another forward date, with the term, amount and interest rate all fixed in advance.

How is it used?

Someone who expects to borrow cash in the future has a risk that interest rates will by then have risen. A forward-forward removes this risk by fixing the rate in advance. Similarly, an investor who will be depositing cash in the future can fix the rate in advance to protect against any possible fall in rates.

A forward-forward starting, for example, 2 months from now and ending 5 months from now – a period of 3 months – is known as a 2 v 5 or 2 × 5 or sometimes 2/5.

The theoretical ...

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