ogoluwa

If you come to me today for a loan that will be paid back in 12 months, and you want your cash money right now, then I'll charge you the 12 month spot rate.

If you come to me today and tell me you're going to need a loan in two years, and the loan will be paid back in 12 months after you get your cash money (remember you'll get your money in two years), then we would use the one-year forward rate two-years from today.

There are lots of extra details (such as there isn't an actual loan) but that's the idea. Or are you just asking about the mechanics of the calculation?

And I like saying cash money

waldziuchna

theres a trick that Schweser uses....not sure if you have access to that

Wasteoftime

What's the Schweser trick? I do have access. Ohai, thanks - I sort of get it when you put it like that, but not completely.

suyash1989

Think of it in terms of future value. Lets say the 1-year rate is 1% and the 2-year rate is 2%.

So, the FV of $1 in 1 -year is 1.01 and the FV of $1 in 2-years is 1.0404.

Now what is the 1-2 year forward rate? It's just the rate that will grow 1.01 to 1.0404 in one year. That is, 1.0404/1.01 - 1.

Hope that helps anyway.