Implied forward price (forward forward)

nixs · March 25th, 2011, 4:26 pm

HiI'm sure this is simple - so I apologise in advance, but if one has a forward on a stock from time 0 to T1 (call it F_{0,1}) as well a forward from 0 to T2 (F_{0,2}), how does one obtain the implied forward F_{1,2}? You can't exactly use the forward rate argument. Do you use ratios of the actual value of the forward (i.e. S_i e^{(r-q)t_i})? I can't imagine it's something as simple as subtracting the shorter dated one from the longer and discounting. Thanks!N

nixs · March 25th, 2011, 4:28 pm

btw, I know that F_{t,T}=S_t e^{(r-q)(T-t)}, however, today I only know S_0, F_{0,1} and F_{0,2}

marpa · March 26th, 2011, 5:35 am

E(E(S(T2) | T1) | t) = E(S(T2) | t) = F(t, T2) (t<=T1<=T2)M.