The forward rate over the future period (T₁,T₂] as observed at the earlier time t can be computed from bond prices by the formula

On the other hand, the futures rate is given by the expectation of the T₂-maturity short rate observed at T₁ under the risk neutral measure conditional on the information at t. Find the spread between the forward rate and the futures rate, assuming that the interest rate dynamics follows the Hull–White model.

Transcribed Image Text:

1 T2₂ - T1 In B(t, T₂) B(t, T₁)