The time-to-maturity of a Eurodollars futures contract is 4 years and the time-to-maturity of the rate underlying the futures contract is 4.25 years.The standard deviation of the change in the short term interest rate,σ = 0.011.What does the model in the text estimate as the difference between the futures and the forward interest rate?
A)0.105%
B)0.103%
C)0.098%
D)0.093%

Question

The time-to-maturity of a Eurodollars futures contract is 4 years and the time-to-maturity of the rate underlying the futures contract is 4.25 years.The standard deviation of the change in the short term interest rate,σ  = 0.011.What does the model in the text estimate as the difference between the futures and the forward interest rate?
A)0.105%
B)0.103%
C)0.098%
D)0.093%

Quizplus · Accepted Answer

With the notation in the text,the futures rate exceeds the forward rate by 0.5σ ²T₁ T₂ .In this case σ=0.011,T₁=4 and T₂=4.25 so the difference between the forward and futures price is 0.5×0.011×4×4.25=0.00103.

The Time-To-Maturity of a Eurodollars Futures Contract Is 4 Years