Fed fund futures arbitrage is based on the assumption that LIBOR and Fed funds are perfect substitutes.

Question

Quizplus · Accepted Answer

Fed fund futures arbitrage is not based on the assumption that LIBOR (London Interbank Offered Rate) and Fed funds are perfect substitutes, as they represent different borrowing costs and are influenced by different factors. Fed funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight, while LIBOR is an average interest rate calculated through submissions of interest rates by major banks in London and is used for loans between banks.

Fed Fund Futures Arbitrage Is Based on the Assumption That