We use the data in Table 4.3 once more, but now we need the forward rates for the relevant maturities in order to "predict" the cash flows on the floating leg for the second and third payment:

The first cash flow is known, since it is related to the last observed LIBOR rate.

Then, we calculate and discount the net "forecasted" cash flows:

The result, of course, is the same as with approach 1 .

Data From Table 4.3

Data From Example 4.4

Data From Example 4.5

Transcribed Image Text:

f(0, 0.25, 0.75) f2(0, 0.25, 0.75) f(0, 0.75, 1.25)= 0.75 x 0.047-0.25 x 0.043 0.5 0.049, 2x (e0.049x0.5-1) = 0.04960518, 1.25 x 0.05 0.75 x 0.047 0.5 = 0.0545, f2(0, 0.75, 1.25)=2x (e0.0545x0.5 -1) = 0.05524935.