Financial Risk Manager Part 1
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A financial analyst working for a fixed-income investment fund is constructing the risk-free forward rate curve. The analyst has observed the term structure of risk-free spot rates, presented below:
| Time (T) | Spot Rates |
|---|---|
| 1 Year | 2.5% |
| 2 Years | 2.0% |
| 3 Years | 1.5% |
| 4 Years | 1.0% |
| 5 Years | 0.5% |
| 6 Years | 0.0% |
| 7 Years | -0.5% |
Based on the given term structure of risk-free spot rates, which one of the accompanying charts accurately depicts the 1-year forward rate curve commencing at each respective time T?
A
2.5% 2.5% 2.0% 2.0% 1.5% 1.5% 1.0% 1.0% 0.5% 0.5%
B
2.5% 2.5% 2.0% 2.0% 1.5% 1.5% 1.0% 1.0% 0.5% 0.5%
C
2.5% 2.5% 2.0% 2.0% 1.5% 1.5% 1.0% 1.0% 0.5% 0.5%
D
2.5% 2.0% 1.5% 1.5% 1.0% 1.0% 0.5% 0.5%