What is the statistical interpretation of the expected future spot rate?
Fill in the blank with correct word.
Answer: The expected future spot rate is the conditional mean of the probability distribution of future spot rates. The probability distribution describes all of the possible realizations (or ranges of realizations) of the future spot rate and assigns probabilities to those values (or ranges of values). The conditional mean of the probability distribution of future spot rates takes a probability weighted average of those possible realizations (or ranges of realizations). We say that the expectation is conditional because we use all available information at the time when we are describing the probability distribution.
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Insurance can be described as:
A: Transferring the risk of loss from an insured to an insurance company; B: The substitution of certainty for uncertainty; C: Protecting the insured against loss in accordance with the policy for the amount insured and for the period of time agreed upon; D: All of the above.
In "Portfolio Strategies for Outperforming a Benchmark" (appearing in Handbook of European Fixed Income Securities published by John Wiley & Sons in 2003),
the authors, William Lloyd and Bharath K. Maniumm, set forth the following six major principles for a good bond market index: Principle 1: Relevant to the investor. Principle 2: Representative of the market. Principle 3: Transparent in rules with consistent constituents. Principle 4: Investible and replicable. Principle 5: Based on high data quality. Principle 6: Independent. Explain why each of these principles is important in creating a bond market index.