Two spot rates imply a forward rate A. Borrow 1,000,000 at 4% for 2Y. Have to pay back 1,000,000 × (1 + 4% × 2) = 1,080,000 1. Lend 1,000,000 at 3% per 1Y. Gain: 1,000,000 × (1 + 3% × 1) = 1,030,000 2. Then invest 1,030,000 for another 1Y 1,030,000 × (1 + × 1) For [A] to be equivalent to [1+2] , the 12x24 rate must be = 1,080,000 1,030,000 − 1 = 4.85% 18/97