Sir explained that this question is to be solved via weighted AM formula and the answer will be slightly less than AM but in this question the answer from AM is coming to 8.59% which means the actual answer should be less than 8.59 but the correct answer is 8.61 which is slightly more than AM . Can someone explain this?
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I believe the AM way, where the GM is just slightly less than AM, works well when we are going forward, that is when we are trying to find the 2-year spot rates through the 0y1y & 1y1y spot rates.
When working backward, i.e. finding 1y1y through 0y2y & 0y1y, the AM is very close to GM, but not necessarily above