Hi All,
I’m struggling to find a connection between forward rates and spot rate Treasury curve. Forward rate is implied from the spot curve. What is the significance of forward rates? ?
They’re used to price FRAs, for example.
Why forward rates?
if you had a bond that was priced fairly today (earns the spot rate today) and another that was priced fairly one year from now (earns that time period’s spot rate) and you had to be indifferent between those two bonds
you would buy the bond - allow it to earn interest for that one intervening year (earn the forward rate) and gladly swap that bond out at the end of one year for the one year ahead bond.
so (1+s0) (1+f1) = (1+s1)
CPk,
I understand what is forward rates- I’m just questioning the utility of it.
Thanks,
In pure expectations theory, forward rates are considered the best predictors of future spot rates.
Thanks guys, I think I get it.
My pleasure.
Small error but the idea was right:
(1+s0) (1+f1) = (1+s1) ^2