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## Tuesday, August 5, 2014

### fwd curve ^ spot curve - different x-axis!

ICAP terminology --
effDate := accrual starts. Therefore, fwd-starting deals have effDate long after execution date.
maturity := accrual ends.
tenor := accrual period length := maturity - effDate

A Fwd curve consisting of 22 points describes 22 FRA deals with identical accrual length, but 22 different accrual-start dates. (Both Mark Hendricks and NYU.)

spot rate r(t)= rate of a loan starting today, with maturity = t
fwd rate f(t) = rate of a FRA starting at t, with a standard and Implicit tenor (say, 6M)

* spot curve with 33 numbers describes loans with 33 different loan maturities
* fwd curve with 22 numbers describe FRA deals with Identical accrual length, but 22 different fwd-start dates.

So the x-axis has different meanings! Relationship between the 2 curves are described by Mark Hendricks + Bruce Tuckman with an intuitive explanation!.

I believe the fwd curve (with infinitesimal tenor) is based on the theoretical concept of instantaneous fwd rate (IFR)... but let's not get bogged down with technicalities.