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Quantitative Finance Level 1

The blue curve in the above plot shows the interest rate for short-term loans set by the United States Federal Reserve Bank. As you can see, the rate has a long term downward trend, and has been near zero since 2009. The gray curves show projections for the future value of the short-term rate from the forward curve. What can we say about the forward projections vs the actual short-term interest rate set by the Fed?

The forward curve usually underestimates the rise in short-term interest rates The forward curve is equally likely to over- or underestimate the short term interest rate. The forward curve usually overestimates the rise in short-term interest rates

Josh Silverman by Josh Silverman

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1 solution

Syed Baqir
Aug 1, 2015

The curve is clearly overestimating since it is above our trend line.

Blue curve seems to go downn.

11 Helpful 0 Interesting 0 Brilliant 7 Confused

Blue curve is not the trend line, it is the actual interest rate. the actual interest rate (blue) has rarely overlapped with the grey projections line. Hence, since the grey lines are often above the blue lines, it has overestimated future short interest rate

Jessie Lim - 3 months, 2 weeks ago

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