Yes, the differences should be small at about <10% and for indications that may be good enough.
But without knowing the assumptions made, one could run into difficulty when extending its usage. Are the errors still small for other durations? People love to extend the use of an indicator, right?
Best,
Walter
Walter, here is the exact formula:
$FRR2_10exact = (((1 + $r10)^10 / (1 + $r2)^2)^(1/8) -1) / $r10
It gives the same result as my short formula.
Enjoy.
Oh, I get it now! You’re using the continuously compounded forward rate. So you weren’t neglecting compound interest!
There is obviously no provision for compound interest in my short formula.
Good that we have cleared this up now - hope the formula is useful.
Georg,
Check https://en.wikipedia.org/wiki/Forward_rate - the formula you use is for the continuously compounded forward rate - except you use SMAs for the data points. I’m good now.