Implied forward credit spread

The calculation of the forward credit spread is critical to the valuation of credit spread products the payoff of spread forwards is highly sensitive to the implied forward credit spread. 

Therefore, the forward credit spread is the difference between the forward rate implied by the risky security less the forward rate implied... 

Central banks and market practitioners use interest rates prevailing in the government bond market to extract certain information, the most important of which is implied forward rates. These are an estimate of the market s expectations about the future directirMi of short-term interest rates. They are important because they signify the market s expectafirMis about the future path of interest rates however, they are also used in derivative pricing and to create synthetic bond prices from the extent of credit spreads of corporate bonds. 

The reason to use implied volatility is that market anticipates mean reversion and uses the implied volatility to gauge the volatility of individual assets relative to the market. Implied volatility represents a market option about the underlying asset and therefore is forward looking. However, the estimate of implied volatility is conditioned by the choice of other inputs in particular, the credit spread applied in the option-free bond and the conversion premium of the tmderlying asset (Example 9.2). 

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