The time-to-maturity of a Eurodollar 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, = 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

Quizplus · Accepted Answer

With the notation in the text,the futures rate exceeds the forward rate by 0.5F1F1F1S1F1F1F10²T₁T₂.In this case F1F1F1S1F1F1F10=0.011,T₁=4 and T₂=4.25 so the difference between the futures and forward price is 0.5×0.011×4×4.25=0.00103.

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