Hey guys, might just be confusing myself with the way the CFAI denotes spot and forward rates, but for one question they want you to calculate the two year spot rate (s2) using the three year spot rate (s3=.07) and f(2,3), the 3 year forward rate two years from now=.0852.
Does that not make sense to anyone else either? To calculate s(2), I thought it would have been something like s(2)=[1+s(1)*1+f(1,1)]^2
Again, this is a question on the CFA website assessments test, Fixed Income-Akron
(1+s2)^2 * (1+f(2,3)) = (1 + s3)^3
logic -> invest in a 2 year security (1+s2)^2 and move it forward one year (1+f(2,3)) OR invest in a 3 year security (1+s3)^3 -> you should be indifferent.
(1+s2)^2(1.0852) = (1.07^3)
s2 = sqrt(1.07^3 / 1.0852) - 1 = 6.24%
Yup, same position here. especially after i refer to EOC no 13 (reading 42)
Are you sure that that notation means the 3-year forward rate starting 2 years from now? I suspect that it means the _ 1-year _ forward rate starting 2 years from now.
I just copied directly from the assessment question, which CFAI denotes f(2,3). When they denote like that in the curriculum, that would mean the three year forward rate two years from now, f(t*,T)
BTW, am an avid reader of your summaries (which are fantastic) and actually referenced your write-up on spot/forward rates before posting. My guess is that it is supposed to be f(2,1) as well