PPT Slide

Hence, at time 0, the commitment to pay Riti at time ti+1 and the strategy

of holding a bond P(0, ti) and shorting a bond P(0, ti+1) must have the

same value, that is,

or

Note that Ri is the same as the projected forward rate Fi. To avoid

arbitrage, the unknown t-period spot rate ti must be set equal to the

projected forward rate Fi.

Previous slide

Next slide

Back to first slide

View graphic version