Question 14.2: Using the information in Example 14.3.1, calculate the conti...

Financial Enterprise Risk Management

Using the information in Example 14.3.1, calculate the continuously compounded forward rates of interest for the maturities of one to five years.

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The first forward rate, $f_1,$ is simply equal to $s_1$ . Using the relationship in Equation (14.12), $f_2$ can be calculated as $2\timess_2$ less $s_1$ , so:

$e^{-s_TT}=e^{-\sum\limits_{t=1}^{T}{f_t} }$ (14.12)

f_2=(2\times0.05116)-0.05069=0.05163.

Similarly, $f_3$ can be calculated as $3\timess_3$ less $2\timess_2$ , so:

f3 =(3\times0.05219)-(2.05116)=0.05425.

This process can be continued to find all values of $f_t$ , resulting in the values given below:

Term (t)	Forward interest rate $(f_t)$
1	5.069%
2	5.163%
3	5.425%
4	5.207%
5	6.531%

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