Spot-forward pricing relationship

PrepNuggets

The relationship that defines a spot rate (SB) can be decomposed into another spot rate (SA), and a series of forward rates. Based on principle of no arbitrage.

(1+SB)B =  (1+SA)A x (1+Ay(B-A)y)B-A

e.g. (1+S3)3 =  (1+S1) x (1+1y2y)2

See also: Implied forward rate

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