Explanation
Using the formula for continuously compounded forward rates:
F1,2β=T2ββT1βZ2βT2ββZ1βT1ββ
Where:
- Z1β = 3-year zero rate = 4.6% = 0.046
- T1β = 3 years
- Z2β = 4-year zero rate = 5.0% = 0.050
- T2β = 4 years
Substituting the values:
F3,4β=4β3(0.050Γ4)β(0.046Γ3)β
F3,4β=10.200β0.138β=10.062β=0.062=6.2%
Therefore, the 1-year forward rate three years from today is 6.2%.
Answer: A