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$$\frac{1}{(1+r_{02})^2} = E\left(\frac{1}{1+r_{12}}\right)\frac{1}{1+r_{01}}$$ Indeed, in the pricing measure, the distribution of $r_{12}$ has to be such that this relation holds. If you look at drift derivations for the LIBOR market model, a lot of work goes into making this sort of equation hold.


4

There is no conflict here. In the identity, \begin{align*} \frac{1}{(1+r_{02})^2} = E\left(\frac{1}{1+r_{12}}\right)\frac{1}{1+r_{01}}, \end{align*} the expectation is under the year-1 forward measure. However, in the identity \begin{align*} (1+r_{01})E(1+r_{12})=(1+r_{02})^2, \end{align*} the expectation is under the year-2 forward measure. For ...



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