Can you please explain the logic here:
Year 1: Expected future spot rate =1.994%; Implied Future Spot rate = 1.954%
Year 2: Expected future spot rate =2.139%; Implied Future Spot rate = 2.684%
in which year will the forward value increase and why? Thank you!
The expected future spot rate is somebody’s guess.
The implied future spot rate, I suspect, is a current forward rate.
What’s the context of these questions?
I would think about the convergence of forward rate to the expected spot rate:
Year 1: forward rate will increase
Year 2: forward rate will decrease
Any ideas?
The question is : in which year will the forward value increase and why? in the questions, they gave me those two data points and asked that question.
In year 2, the forward value will increase as the forward rate > expected future spot rate (this assumes that the expectations bear out - a big huge if).
The implied forward rate is priced on no arbitrage.
It moves in tandem with changes of the yield curve, you can short or long a contract at the current no arbitrage price if you think future spot rate will be different than the ones implied.
What is the correct logic here? the wider the implied is from the expected the more it will appreciate ???
What is the correct logic here? the wider the implied is from the expected the more it will appreciate ???