spot and forward rates between, forward, problems, like

lxwarr30

I've been working fixed income problems all day and it's going...okay, except I have a mental block about converting between spot and forward rates. Anyone have any words of wisdom? Problems like - what is the 1-year forward rate 2 years from today, blah blah. Even with the answer in front of me I don't get it.

kamara5

i have read ethics part apart from GIPS .(GIPS seems too difficlut to me),
how to go about the same , also can i leave it till end and study the same two days before the exam.

JGovender

Not at all vnnvnn.. I do understand most of the things (I believe) but I don't remember anything... Long struggle ahead....

pacmandefense

great explanation anish. you' re so well prepared

johnnyBuz

smuggycfa Wrote:
-------------------------------------------------------

Oh ya, the rate is an annual rate so it needs to be adjusted for time periods.
> >
>
> I think this will be
> (1 + 2yrs spot rate)^2 (1+ 1 yr fwd rate 2 yrs
> from now) = (1 + 3 yrs spot rate)^3

lc26mizzou

Thanks, everyone. I think I get it now. I'll practice again tomorrow with all this in mind. Much appreciated.

orang3eph

one thing that really helps me with these, is that the exponents on each side of the equation need to add up to the same number.
ie a^3 x b^4 = c^7 (because 3+4 = 7). or, a x b^6 = c^7 (because a is the same as a^1).

if they don't add up, your equation is wrong somehow, because the time periods don't match.

draz

And 2 yr spot rate = 2f0 = 2 yr fwd rate from now (t = 0)



Edited 1 time(s). Last edit at Wednesday, March 30, 2011 at 06:14PM by optiix.

thisisbrianly

This is what I remember offhand.... Someone, please correct me if I am wrong.

Draw a time line.
Say I have 2 yr spot rate (current rate for 2 yrs loan) and 3 yr spot rate (current rate for 3 yrs loan) and I need a 1 yr forward rate, 2 yrs from now.

0_____ 1 yr______2 yrs _____3 yr


Go from now (t = 0) to t = 2 you need the 2 yr spot rate which you have.
From 2 yr to 3 yr you need a 1 yr forward rate (the rate applicable 2 yrs from now)

The combined effect of these two should be the 3 yr spot rate. (If I invest for 2 yrs and then re invest for 1 yr, it should be equal to me investing for 3 yrs right now.)

So (1 + 2yrs spot rate)(1+ 1 yr fwd rate 2 yrs from now) = (1 + 3 yrs spot rate)

The subscripts are there to make it more manageable... They don't have much to do with the concept per se.



Edited 1 time(s). Last edit at Wednesday, March 30, 2011 at 05:11PM by anish.

joemoran

Conceptually I get what we're trying to calculate but not actually how to calculate it. I could just memorize, I suppose, but I like to have a handle on what I'm actually doing. Plus all the subscript f's in the formula give me a headache. 1f0 1f2 all that. Boo.