Using the following rates: 3M 90-day eurodeposits 3.50% and 6M 180-day eurodeposits 3.75%, what is the rate for a deposit which runs from 3 to 6…

To determine the forward-forward deposit rate running from 3 to 6 months (a 90-day period starting 90 days in the future), the money market compounding principle for Eurodeposits using the Actual/360 day-count convention is applied. The formula relates the 6-month (180-day) total return factor to the product of the 3-month (90-day) factor and the 3-to-6 month forward factor: $(1 + 0.0375 \times 180/360) = (1 + 0.0350 \times 90/360) \times (1 + r \times 90/360)$. Solving for $r$ yields $1.01875 / 1.00875 = 1 + r \times 0.25$, which gives $r \times 0.25 = 0.00991326$. Multiplying by 4 converts this period yield into an annualized rate of $3.9653\%$, rounded to $3.965\%$.

A: This rate is incorrectly calculated by applying an inaccurate period weighting or compounding factor.

B: This value results from subtracting rates without properly adjusting for term structure interest factors.

C: This rate of 3.625% is the simple arithmetic average of 3.50% and 3.75%, ignoring time value of money and compounding logic.

- ACI Financial Markets Association, ACI Dealing Certificate Syllabus (002-101), Topic 2: Money Markets, Section 2.4 "Forward-Forward Rates and FRAs", pp. 42-46.

- Steiner, B. (2011). Foreign Exchange and Money Markets: Theory and Practice, Butterworth-Heinemann, Chapter 5. DOI: https://doi.org/10.1016/B978-0-7506-5440-1.50008-8.