q3 How is the implied forward rate calculated?
a3 Eurodollar futures reflect market expectations of forward 3-month rates. An implied forward rate indicates approximately where short-term rates may be expected to be sometime in the future.
The following formula provides a guideline for calculating a 3-month rate, three months forward:
1 + 6mth spot rate x 182/360 = (1 + 3mth spot rate x 91/360) (1 + 3mth fwd rate x 91/360)
For example: 3-month LIBOR spot rate = 5.4400%
6-month LIBOR spot rate = 5.8763%
3-month forward rate = R
1 + .058763 x 182/360 = (1 +.0544 x 91/360)(1 + R x 91/360)
1.029708 = (1.013751)(1 + R x 91/360)
1.015740 = (1 + R x 91/360)
0.062270 or 6.227% = R = the implied forward rate
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