How spot rates relate to forward rates

Due to the arbitrage method that was explained in the article on what are forward rates, it can be seen that there is a relationship between spot rates and forward rates.

Namely, the forward rates have a relation to the term of the spot rates, of course there is a chicken and egg scenario that arises with regard the actual spot rates and whether they are calculated based on the general prevailing view of the market, or in fact if questions around future rates are asked first and then from these the spot rates are derived.

Finding out what relates to what and why people choose this course of action rather than that in the markets is actually quite difficult, and cause and effect is sometimes quite blurred in the markets!

However, overall we say that the spot rates equates to the geometric mean forward rate.

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How spot rates relate to forward rates

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