Final answer:
To calculate the forward rate for a period between 1 year and 1.25 years using zero interest rates with continuous compounding, we normally utilize the continuous compounding formula, but without the specific interest rates, we cannot compute the exact forward rate.
Step-by-step explanation:
To calculate the forward rate for a three-month period starting in one year using zero interest rates with continuous compounding, we need to understand that the formula for continuous compounding is given by the formula: Future Value = Principal x e^(interest rate x time). Using the continuous compound interest formula, the future value FV for the period starting in 1 year and ending in 1.25 years (3 months later) can be calculated using the interest rate that applies to that timeframe. However, since we do not have the specific zero interest rates provided for 1 year and 1.25 years, we cannot compute an exact number.
Compound interest is key in this scenario as it takes into account the interest that accumulates over time and adds it to the principal to calculate the new amount on which future interest is earned. To determine the forward rate, essentially, the formula that would be used (if the specific rates were provided) would be the rate that equalizes the return on two different investment strategies over the given time frame: investing for the whole period from now until 1.25 years versus investing for 1 year and then reinvesting into the forward rate for the next quarter.