Forward Rates

CFA Level II Fixed Income
#1

Hi

Came across a practice question that provides two series of forward rates:

F(n-1,1) …i understand this is (n-1) year forward rate, 1 year from today

F(1,n-1) …1 year forward rate, (n-1) years from today

Not sure how to interpret and use above series to get holding period return given spot rates…

thanks…

#2

Can you post the question?

#3

summary of ques is:

5 year spot rate = 7%

F(1,4) = 8.02%

F(4,1) = 11.10%

Answer:

1 year holding period return is 3% as follows…

(1.07)5 = (1.03)1 * (1.0802)4

i dont get why F(1,4) is used instead of F(4,1)

#4

Your interpretation of the notation is backward.

F(1,4) is the annualized forward rate beginning 1 year from now and for a duration of 4 years (i.e., ending 5 years from now). So F(1,4) is the four year forward rate, one year from today.

Edit: Corrected typo

#5

It would be the one year forward rate, beginning in four years.

#6

These two sentences seem to contradict each other.

Check the 2019 Level II curriculum, volume 5, p. 7, paragraph 5:

F(T, T) means the T-period forward rate starting at time t = T.

So F(1, 4) means the 4-year forward rate beginning one year from today, and F(4, 1) means the 1-year forward rate beginning four years from today.

#7

O i get it …my bad…

thanks

#8

Thanks for pointing out - have corrected the typo