Forward Swap rate

[Laura517]

Hello,

This might be a silly question, but I am really confused with forward Swap rates. Can someone please help by providing the steps in calculating the answer for the question below:

Question: Given below is the term structure.

maturity in years swap rate
1 2.5%
2 3.00%
3 3.5%
4 4.00%
5 4.50%

The 2 year forward swap rate starting in 3 years is given by:
Ans: 6.02%

I used the formula F3,5 = (F5*t5 - F3*t3)/(t5 - t3) and got the same answer.

GARP solution uses a different method Did I use the correct formula in getting to the solution or was it by chance ?

 

[Alex_1]

I am bit tired now and maybe I haven't read your question well, but I think it highly depends on the compounding convention if indicated in the question text... From which exam was this question?

I remember Hull stating that the two methods (the one you used and the one probably used in the GARP solution) should lead to the same result IF the rates are continuously compounded. Otherwise the results are only approximately the same (this should be in T3, Hull, Chapter "Interest Rates").

 

[Laura517]

This question is from the GARP sample exam. I checked T3.Hull Interest rates. I believe I can use the one I mentioned (for continuously compounded) as that was widely used throughout Hull. I saw the other method mentioned too.

Thank you so much for your response!