What does the 1y1y forward rate imply about the market?

Under pure expectations theory, the 1y1y forward rate represents the market's expectation of the 1-year spot rate 1 year from now. In practice, forward rates embed risk premium and convexity bias, so they tend to be higher than actual future short rates.

How are forward rates used in interest rate swap valuation?

Fixed-for-floating swaps are valued by projecting floating leg cash flows using forward rates derived from the OIS or SOFR curve, discounting all cash flows at OIS rates, and finding the fixed rate that makes present value of fixed and floating legs equal.

Forward Rate 1y1y from Spot Rates

Calculate the 1-year forward rate 1 year from now (1y1y) using the 1-year and 2-year spot rates: (1 + s2)^2 / (1 + s1) - 1, representing the implied future short-term rate from the yield curve.

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Frequently Asked Questions

What does the 1y1y forward rate imply about the market?

How are forward rates used in interest rate swap valuation?