FlorenceCC
Member
Hi @David Harper CFA FRM,
I have a question regarding the "switch" for lack of a better term, between continuous and discrete compounding, after reading your example in the BT notes p. 55 (derive fwd IR from a set of spot rate). A set of continuously compounded zero rates is provided, which we use to calculate various continuous fwd rates.
However, in the following example we calculate the semi annual forward rate F(1.5,2), using the discrete compounding formula [(1+(2.5%/2)^2*2)/(1+(2.25%2)^1.5*2)]. Yet we still use our CC zero rates. So I am a little confused. Should we not have calculated the semi annual equivalent of our CC rates and only then determined our fwd based on discrete compounding?
Many thanks in advance for your feedback.
Kind regards
I have a question regarding the "switch" for lack of a better term, between continuous and discrete compounding, after reading your example in the BT notes p. 55 (derive fwd IR from a set of spot rate). A set of continuously compounded zero rates is provided, which we use to calculate various continuous fwd rates.
However, in the following example we calculate the semi annual forward rate F(1.5,2), using the discrete compounding formula [(1+(2.5%/2)^2*2)/(1+(2.25%2)^1.5*2)]. Yet we still use our CC zero rates. So I am a little confused. Should we not have calculated the semi annual equivalent of our CC rates and only then determined our fwd based on discrete compounding?
Many thanks in advance for your feedback.
Kind regards
