Suppose that OIS rates of all maturities are 6% per annum,continuously compounded.The one-year LIBOR rate is 6.4%,annually compounded and the two-year swap rate for a swap where payments are exchanged annually is 6.8%,annually compounded.
-Which of the following is closest to the LIBOR forward rate for the second year when LIBOR discounting is used and the rate is expressed with annual compounding

Question

Quizplus · Accepted Answer

When LIBOR discounting is used,the OIS rates are irrelevant.The two year LIBOR/swap zero rate,R,is given by $\frac { 6.8 } { 1.064 } + \frac { 106.8 } { ( 1 + R ) ^ { 2 } } = 100$ so that R=6.8137%.We can calculate the forward rate from the one- and two-year zero rates as 1.068137²/1.064-1 or 7.223%

Suppose That OIS Rates of All Maturities Are 6% Per