Hello Hope you are doing well. The instantaneous forward rate calculation is contradictory between solutions of Q12.5 (v) and X3.1(ii). The statement in question is similar between two but I failed to understand why does the solution in one applies the formula of instantaneous forward rate and other one says that it cannot be applied. I think it should be same for both - either applied or cant be applied? Please suggest my understanding. Thanks in advance Yogesh
Hi Yogesh Did you mean Q12.3 (v)? I don't think these solutions are contradictory. Neither question contains sufficient information to use the formula given in the Core Reading. In particular, neither question gives us a derivative we can evaluate. Both questions try to estimate the instantaneous forward rate approximately, but they use different approaches. The solution to Q12.3 tries to estimate the rate of change of the spot rate approximately and then employ the formula given in the Core Reading. X3.1(ii) leads us to an alternative way of estimating the instantaneous forward rate by asking us to calculate to one-year spot rates first. So, both approaches are approximate and if employed on the same question would be likely to lead to different estimates of the instantaneous forward rate. I hope that helps Gresham
Thanks Gresham. My question here is can I use the approach given in Q12.3(v) for any question on calculation of instantaneous forward rate?
I haven't seen m(any) past exam questions on instantaneous forward rates, but I think that is a reasonable approach, which attempts to use a formula given in the Core Reading, so I would expect it to gain credit in the exam
