Meredius
New Member
Hello all,
I'm being very specific as to the formula to Define and Interpret the Forward rate given spot rates.
I understand the formula and the equality of it but I don't understand the powers raised.
So for the formula and example of calculating the 6 month forward we have the one year spot rate raised to the power of 2 (because we have 2 6 month periods to contend with if I understand correctly?)
OK but then on the following page, why are the powers raised to 4 and 3 respectively? Is it because the "unit of time" being measured is in 6 month increments? If this were yearly, would it be the power of 2 for the two year spot rate divided by the power of 1 for the one year spot-rate, assuming calculating for the one year forward one year from now?
Thanks!
I'm being very specific as to the formula to Define and Interpret the Forward rate given spot rates.
I understand the formula and the equality of it but I don't understand the powers raised.
So for the formula and example of calculating the 6 month forward we have the one year spot rate raised to the power of 2 (because we have 2 6 month periods to contend with if I understand correctly?)
OK but then on the following page, why are the powers raised to 4 and 3 respectively? Is it because the "unit of time" being measured is in 6 month increments? If this were yearly, would it be the power of 2 for the two year spot rate divided by the power of 1 for the one year spot-rate, assuming calculating for the one year forward one year from now?
Thanks!
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