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Forward rate setting

Dear Expert,

I am reading forward rate from Steven Shreve’s Stochastic Calculus.

I am watching the below video with a hope it will help me

I some how struggle to understand how the process of selling an instrument short today and going forward setting up a long position work.

Attached is a small write-up from the content in the video (till time 2.4minutes)

I have also listed my questions in red colour. The text in blue is as is narrated by the present in the video. The text in brown is my understanding.

Kindly help me in understanding why we do this.

If anyone can even refer me to another study material/book/article I will be more than happy to understand it from that source.

The above point has been a source of desperation to understand, but I have not made much progress in understanding it.

Kindly help.


  • Forward rates - Stochastic.pdf
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