Forward rates ____________ future short rates because ____________.
A) are equal to; they are both extracted from yields to maturity
B) are equal to; they are perfect forecasts
C) differ from; they are imperfect forecasts
D) differ from; forward rates are estimated from dealer quotes while future short rates are extracted from yields to maturity
E) are equal to; although they are estimated from different sources, they both are used by traders to make purchase decisions

Question

Quizplus · Accepted Answer

Forward rates differ from future short rates because they are imperfect forecasts. Forward rates are theoretical rates indicating the cost of borrowing money in the future, derived from the current yield curve. They are not guaranteed predictions of future interest rates but rather expectations based on current information. Future short rates, on the other hand, are the actual rates that will prevail in the future, which can be influenced by unforeseen economic factors and central bank policies.

Forward Rates ____________ Future Short Rates Because ____________

Forward Rates Future Short Rates Because