L4 - The relationship between swaps and forward rates

Question 1

What does the phrase ‘no free lunch’ mean?

Answer 1

• essentially means no arbitrage opportunity based on the information we have now

Question 2

How to find the forward rate for any future time period?

Answer 2

• As forward rates are the expected future spot rate
  
  • negative sloping spot curve –> implies a small forward/expected future spot rate
  • positive sloping spot curve –> implies a higher forward/expected future spot rate