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Assume that the pure expectations theory is correct and complete. If the forward rates over the second, third, fourth,...

  1. Assume that the pure expectations theory is correct and complete. If the forward rates over the second, third, fourth, and fifth periods are 5.9, 6.4, 6.7 and 6.9% respectively, what is the market’s consensus opinion as to the value of the one-period spot rate that will be in existence at date 2?

By definition is the one period spot rate d at date 2 equal to f3?

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Answer #1

Yes, under pure expectation theory, the spot rate = expected future rate.

Hence, the one period spot rate d at date 2 equal to f3

Hence, the market’s consensus opinion as to the value of the one-period spot rate that will be in existence at date 2 = 6.4%

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