1Charles Cao
5,Interest Rates Futures
Summary
Asset Prices Depend on the Interest Rates
Spot Rates and Forward Rates
How to Determine the Price of the Interest
Rate Futures
How to Hedge Interest Rate Risk
2Charles Cao
Spot Rates
Interest rates on zero-coupon bonds
The n-year spot rate is the interest rate
on an n-year investment of the zero-
coupon bond
No intermediate payment (coupon)
Both the principal and interest will be
paid on the last day
3Charles Cao
Forward Rates
For a 1-year zero-coupon bond,the spot rate
is 10%
For a 2-year zero-coupon bond,the spot rate
is 12%
What is the interest rate for the second year?
Forward Rate,Interest rates implied by current
spot rates for periods of time in the future
Forward Rates,Example
Maturity
(year)
Spot
Rate (%)
Total
Returns
Forward
Rate (%)
511
611
411
011
5
4
3
2
.f
.f
.f
.f
5
4
3
2
1
111
011
810
510
010
5
4
3
2
1
.r
.r
.r
.r
.r
521 1 01 0 0 11 0 00,e,
271 5 51 0 0 41 1 00,e,
371 2 31 0 0 21 0 50,e,
261 3 81 0 0 31 0 80,e,
19174100 51110,e,
4Charles Cao
5Charles Cao
The Relationship Between the Spot
and Forward Rates,Example 1
1-year zero,r1 = 10%
2-year zero,r2 = 10.5%
in each year,the rate is 10.5%
Infer the forward rate,f2,the interest
rate from the beginning to the end of
the second year
6Charles Cao
The Relationship Between the Spot
and Forward Rates,Example 1
r1 = 10% f2 =?
r2 = 10.5% r2 =10.5%
7Charles Cao
The Relationship Between the Spot
and Forward Rates,Example 1
%...f
rrf
rfr
ee
eee
rfr
rfr
1111010021050
2
211
100100
2
122
221
211
211
221
221
8Charles Cao
The Relationship Between the Spot
and Forward Rates,Example 2
2-year zero,r2 = 10.5%
3-year zero,r3 = 10.8%
Infer the forward rate,f3,the interest
rate from the beginning to the end of
the third year
9Charles Cao
The Relationship Between the Spot
and Forward Rates,Example 2
r3 = 10.8% r3 = 10.8%r3 = 10.8%
r2 = 10.5% f3 =?r2 = 10.5%
10Charles Cao
The Relationship Between the Spot
and Forward Rates,Example 2
%....f
rrf
rfr
ee
eee
rfr
rfr
41111402105031080
23
312
100100
3
233
332
312
312
332
332
11Charles Cao
The Relationship Between the
Spot and Forward Rates
In general:
T-year zero,the spot rate is r
T*-year zero,the spot rate is r*
T* > T
Infer the forward rate,f,the interest rate
between T and T*
TT
rTTrf
12Charles Cao
The Zero-coupon Yield Curve
It is a curve that shows the relationship
between the spot rate and maturity
The term structure
The upward-sloping yield curve
The downward-sloping yield curve
T r e a s u r y Y i e l d C u r v e
0
1
2
3
4
5
6
1
mo
3
mo
6
mo
1 yr 2 yr 3 yr 5 yr 7 yr 10
yr
20
yr
%
13
Source,Wall Street Journal,11/12/2003
Charles Cao
14Charles Cao
Treasury Bond and
Treasury Note Futures
They are traded on the CBOT
Treasury bond futures are based on T-bonds
with maturities of at least 15 years
Long-term contracts
Treasury note futures are based on T-notes
with maturities of 2,5 and 10 years
Intermediate-term contracts
15Charles Cao
Price quotes of the T-bond
T-bonds are quoted in dollars and 32nd of a
dollar
The quoted price is for a bond with a face
value of $100
A price of 93-14 is 93 14/32,or 93.4375
If the face value of the T-bond is $100,000,
the price of the bond is $93,437.50
cash price = quoted price + accrued interest
since last coupon date
16Charles Cao
Price quotes of the T-bond,Example
Today is March 5,2003
The bond is an 11% coupon bond
Maturity date,July 10,2023
Quoted price,95-16 (95 16/32 = 95.5)
The first coupon date is Jan,10,2003
The second coupon date is July 10,
2003
17Charles Cao
Price quotes of the T-bond,Example
There are 54 days between Jan,10 and
March 5,2003
There are 181 days between Jan,10
and July 10,2003
Coupon payment is $5.5
18Charles Cao
Price quotes of the T-bond,Example
The accrued interest between Jan,10
and March 5 is:
64.1$5.5$1 8154
14.97$64.1$5.95$
Thus,the cash price is:
19Charles Cao
T-bond Futures
T-bond futures are quoted similarly
Expiration months,March,June,Sept.,
Dec.
The first delivery day is the first business
day of the month
It is based on the assumption that the
underlying bond has an 8% coupon
20Charles Cao
T-bond Futures
The 8% coupon rate is not restrictive
The CBOT permits delivery of bonds
with coupons other than 8%
The appropriate adjustment--conversion
factor
In general,there are 30 bonds available
for delivery for each contract
21Charles Cao
Conversion Factors (CF)
If the coupon rate of the bond is not
8%,we need to make an adjustment to
the price of the futures paid by the long
to the short
The conversion factor is defined for
each eligible bond for a given contract
22Charles Cao
Conversion Factors (CF)
The CF is the price of a bond with a face
value of $1,coupon and maturity equal to
that of the deliverable bond,and yield of
8%
cash price =
quoted futures price x conversion factor
+ accrued interest since last coupon date
23Charles Cao
Conversion Factor,Example
Consider a 14% coupon bond with 20-year to
maturity,The face value is $1,The coupon
payment is made every 6 months ($0.07),
The discount rate is 8% per year (4% per 6-
month period),What is the price of the bond
(conversion factor)?
59381
0401
1
0401
070
40
40
1
.
..
.
i i
24Charles Cao
Cheapest-to-delivery Bond
For each futures contract,there are 30
bonds available for delivery
They are different in the coupon rate
and maturity
The party with the short position can
choose the,cheapest” bond to delivery
25Charles Cao
Cheapest-to-delivery Bond
Since the party with the short position
receives
quoted futures price x conversion factor
+ accrued interest since last coupon date
The cost of the bond is
quoted price + accrued interest since last
coupon date
26Charles Cao
Cheapest-to-delivery Bond
The cheapest-to-delivery bond is the one
for which
quoted price - quoted futures price x
conversion factor
is minimized
i.e.,minimize (cash outflow - cash inflow)
27Charles Cao
Cheapest-to-delivery Bond,Example
The current futures price is $93-08 ($93.25),
The party with the short position decided to
deliver the bond,There are three bonds
available for delivery
Bond
1
2
3
Quoted Price
99.50
143.50
119.75
Conversion Factors
1.0382
1.5188
1.2615
28Charles Cao
Cheapest-to-delivery Bond,Example
The cost of delivering each bond is:
bond 1,99.50 - 93.25 x 1.0382 = 2.69
bond 2,143.50 - 93.25 x 1.5188 = 1.87
bond 3,119.75 - 93.25 x 1.2615 = 2.12
The cheapest-to-delivery bond is bond 2
29Charles Cao
The Wild Card Option
T-bond futures (CBOT),market closes at
2:00 p.m
T-bond,market closes at 4:00 p.m
The party with the short position has the
option to make delivery decision by 8:00
p.m
If decide to deliver,the settlement price
is 2:00 p.m,price
30Charles Cao
The Wild Card Option
If the price declines after 2:00 p.m.,he
will decide to deliver the bond and buy
the cheapest-to-delivery bonds for
delivery
If the price increases after 2:00 p.m.,
he can wait until the next day
The wild card option is not free
31Charles Cao
The Wild Card Option
The wild card option price is already
reflected in the futures prices,which is
lower than it would be without the
option
32Charles Cao
The Pricing of T-bond Futures
Pricing T-bond futures is difficult
because we do not know the timing of
the delivery and the choice of the bond
Assume the cheapest-to-delivery bond
and the delivery date is known
33Charles Cao
The Pricing of T-bond Futures
T-bond futures contract is a contract on
a security with known income,thus
)tT(re)IS(F
where I is the present values of coupons
during the life of the contract
34Charles Cao
The Pricing of T-bond Futures
The procedure:
1,Calculate cash price of the cheapest-to-
delivery bond from quoted price
2,Calculate cash futures price from cash
bond price
3,Calculate the quoted futures price from
the cash futures price
35Charles Cao
The Pricing of T-bond Futures
4,Divide the quoted futures price by the
conversion factor to allow for the
difference between the cheapest-to-
delivery and the standard 15-year 8%
bond
36Charles Cao
The Pricing of T-bond Futures,Example
The cheapest-to-delivery bond is 12% coupon
bond with a conversion factor of 1.4
Delivery will take place in 270 days
Coupon is paid every 6 months ($6),and the
last payment was 60 days ago
The next coupon date is in 122 days
The next-but-one coupon date is in 305 days
37Charles Cao
The Pricing of T-bond Futures,Example
The risk-free rate is 10%
The quoted bond price is $120
Time Chart for the Example
Coupon
payment
Coupon
payment
Coupon
payment
Current
time
Maturity
of futures
contract
60
days
122
days
148
days
35
days
182 days 183 days
270 days
305 days
38Charles Cao
39Charles Cao
The Pricing of T-bond Futures,Example
The cash price of the bond is:
The PV of the coupon is:
80356 36512210,eI /,
9 7 81 2 161 8 2601 2 0,$
40Charles Cao
The Pricing of T-bond Futures,Example
The futures price is:
At delivery,there are 148 days (270-122)
of accrued interest,The quoted futures
price is:
0941258035978121 36527010,e)..(
e)IS(F
/.
)tT(r
2 4 21 2 061 8 31 4 80 9 41 2 5,$,
41Charles Cao
The Pricing of T-bond Futures,Example
Since the futures contract is written on
a standard 8% coupon bond,and 1.4
standard bonds are equivalent to each
12% bond,The quoted futures price is:
8 8 78541 2 4 21 2 0,.,?
42Charles Cao
Treasury Bill Futures
The underlying asset is a 90-day T-bill
The party with the short position should
deliver $1 million of T-bill on any of
three successive business days
The first delivery day is the first day of
the delivery month on which a 13-week
T-bill is issued and a 1-year T-bill has
13-week remaining to maturity
43Charles Cao
Treasury Bill Futures
The T-bill should have about 90-day to
expiration when it is delivered
The T-bill is a discount instrument
It pays no coupons,and the investor
receives the face value at maturity
44Charles Cao
Treasury Bill Futures,Example
The futures contract matures in T years
The T-bill underlying the futures
contract maturities in T*
T* - T ~ 90 days
r,interest rate for risk-free investment
maturing at T
45Charles Cao
Treasury Bill Futures,Example
r*,interest rate for risk-free investment
maturing at T*
The face value of the T-bill is 100
V,the price of a T-bill maturing at T
V*,the price of a T-bill maturing at T*
rTeV 100
TreV 1 0 0
46Charles Cao
Treasury Bill Futures,Example
The current value of the T-bill underlying the
futures contract is V*,and no income is paid
on the T-bill,thus
V
V
e
e
ee
eVF
rT
Tr
rTTr
rT
100
100
100
47Charles Cao
Implied Repo Rates
The interest rate at which an investor can
borrow by selling securities to a financial
institution and agreeing to buy them back
at a higher price
The financial institution does not take any
risk
It is considered as the risk-free rate
It is very close to the T-bill rate
48Charles Cao
Implied Repo Rates
It is the interest rate implied by V* and
F
If the rate of the T-bill maturing at T is
significantly different from the implied
repo rate,it indicates arbitrage
opportunity
49Charles Cao
Implied Repo Rates
Since
We have
VVF
100
F
V
e
F
V
V
rT
1 0 01 0 0
1 0 0
50Charles Cao
Implied Repo Rates
Thus
F
VlnrT
F
Vln
T
r 1
This is the implied repo rate
and
51Charles Cao
Eurodollar Futures
Short-term interest rate futures contract
One of the most active contracts
Traded on the Chicago Mercantile
Exchange (CME) and the London Int’l
Financial Futures Exchange (LIFFE)
A Eurodollar is a dollar deposited in a
U.S,or a foreign bank outside the U.S
52Charles Cao
Eurodollar Futures
The Eurodollar rate = 3-month LIBOR
LIBOR,London Interbank Offer Rate
The Eurodollar rate is higher than the
corresponding T-bill rate
The Eurodollar rate is a commercial
lending rate
T-bill rate is the rate at which the
government borrows (no default risk)
53Charles Cao
Eurodollar Futures
The Eurodollar futures contract is
similar to that of the T-bill futures
One major difference
T-bill futures,the contract price
converges to the price of a 90-day $1
million face value
Eurodollar futures,settled in cash
5,Interest Rates Futures
Summary
Asset Prices Depend on the Interest Rates
Spot Rates and Forward Rates
How to Determine the Price of the Interest
Rate Futures
How to Hedge Interest Rate Risk
2Charles Cao
Spot Rates
Interest rates on zero-coupon bonds
The n-year spot rate is the interest rate
on an n-year investment of the zero-
coupon bond
No intermediate payment (coupon)
Both the principal and interest will be
paid on the last day
3Charles Cao
Forward Rates
For a 1-year zero-coupon bond,the spot rate
is 10%
For a 2-year zero-coupon bond,the spot rate
is 12%
What is the interest rate for the second year?
Forward Rate,Interest rates implied by current
spot rates for periods of time in the future
Forward Rates,Example
Maturity
(year)
Spot
Rate (%)
Total
Returns
Forward
Rate (%)
511
611
411
011
5
4
3
2
.f
.f
.f
.f
5
4
3
2
1
111
011
810
510
010
5
4
3
2
1
.r
.r
.r
.r
.r
521 1 01 0 0 11 0 00,e,
271 5 51 0 0 41 1 00,e,
371 2 31 0 0 21 0 50,e,
261 3 81 0 0 31 0 80,e,
19174100 51110,e,
4Charles Cao
5Charles Cao
The Relationship Between the Spot
and Forward Rates,Example 1
1-year zero,r1 = 10%
2-year zero,r2 = 10.5%
in each year,the rate is 10.5%
Infer the forward rate,f2,the interest
rate from the beginning to the end of
the second year
6Charles Cao
The Relationship Between the Spot
and Forward Rates,Example 1
r1 = 10% f2 =?
r2 = 10.5% r2 =10.5%
7Charles Cao
The Relationship Between the Spot
and Forward Rates,Example 1
%...f
rrf
rfr
ee
eee
rfr
rfr
1111010021050
2
211
100100
2
122
221
211
211
221
221
8Charles Cao
The Relationship Between the Spot
and Forward Rates,Example 2
2-year zero,r2 = 10.5%
3-year zero,r3 = 10.8%
Infer the forward rate,f3,the interest
rate from the beginning to the end of
the third year
9Charles Cao
The Relationship Between the Spot
and Forward Rates,Example 2
r3 = 10.8% r3 = 10.8%r3 = 10.8%
r2 = 10.5% f3 =?r2 = 10.5%
10Charles Cao
The Relationship Between the Spot
and Forward Rates,Example 2
%....f
rrf
rfr
ee
eee
rfr
rfr
41111402105031080
23
312
100100
3
233
332
312
312
332
332
11Charles Cao
The Relationship Between the
Spot and Forward Rates
In general:
T-year zero,the spot rate is r
T*-year zero,the spot rate is r*
T* > T
Infer the forward rate,f,the interest rate
between T and T*
TT
rTTrf
12Charles Cao
The Zero-coupon Yield Curve
It is a curve that shows the relationship
between the spot rate and maturity
The term structure
The upward-sloping yield curve
The downward-sloping yield curve
T r e a s u r y Y i e l d C u r v e
0
1
2
3
4
5
6
1
mo
3
mo
6
mo
1 yr 2 yr 3 yr 5 yr 7 yr 10
yr
20
yr
%
13
Source,Wall Street Journal,11/12/2003
Charles Cao
14Charles Cao
Treasury Bond and
Treasury Note Futures
They are traded on the CBOT
Treasury bond futures are based on T-bonds
with maturities of at least 15 years
Long-term contracts
Treasury note futures are based on T-notes
with maturities of 2,5 and 10 years
Intermediate-term contracts
15Charles Cao
Price quotes of the T-bond
T-bonds are quoted in dollars and 32nd of a
dollar
The quoted price is for a bond with a face
value of $100
A price of 93-14 is 93 14/32,or 93.4375
If the face value of the T-bond is $100,000,
the price of the bond is $93,437.50
cash price = quoted price + accrued interest
since last coupon date
16Charles Cao
Price quotes of the T-bond,Example
Today is March 5,2003
The bond is an 11% coupon bond
Maturity date,July 10,2023
Quoted price,95-16 (95 16/32 = 95.5)
The first coupon date is Jan,10,2003
The second coupon date is July 10,
2003
17Charles Cao
Price quotes of the T-bond,Example
There are 54 days between Jan,10 and
March 5,2003
There are 181 days between Jan,10
and July 10,2003
Coupon payment is $5.5
18Charles Cao
Price quotes of the T-bond,Example
The accrued interest between Jan,10
and March 5 is:
64.1$5.5$1 8154
14.97$64.1$5.95$
Thus,the cash price is:
19Charles Cao
T-bond Futures
T-bond futures are quoted similarly
Expiration months,March,June,Sept.,
Dec.
The first delivery day is the first business
day of the month
It is based on the assumption that the
underlying bond has an 8% coupon
20Charles Cao
T-bond Futures
The 8% coupon rate is not restrictive
The CBOT permits delivery of bonds
with coupons other than 8%
The appropriate adjustment--conversion
factor
In general,there are 30 bonds available
for delivery for each contract
21Charles Cao
Conversion Factors (CF)
If the coupon rate of the bond is not
8%,we need to make an adjustment to
the price of the futures paid by the long
to the short
The conversion factor is defined for
each eligible bond for a given contract
22Charles Cao
Conversion Factors (CF)
The CF is the price of a bond with a face
value of $1,coupon and maturity equal to
that of the deliverable bond,and yield of
8%
cash price =
quoted futures price x conversion factor
+ accrued interest since last coupon date
23Charles Cao
Conversion Factor,Example
Consider a 14% coupon bond with 20-year to
maturity,The face value is $1,The coupon
payment is made every 6 months ($0.07),
The discount rate is 8% per year (4% per 6-
month period),What is the price of the bond
(conversion factor)?
59381
0401
1
0401
070
40
40
1
.
..
.
i i
24Charles Cao
Cheapest-to-delivery Bond
For each futures contract,there are 30
bonds available for delivery
They are different in the coupon rate
and maturity
The party with the short position can
choose the,cheapest” bond to delivery
25Charles Cao
Cheapest-to-delivery Bond
Since the party with the short position
receives
quoted futures price x conversion factor
+ accrued interest since last coupon date
The cost of the bond is
quoted price + accrued interest since last
coupon date
26Charles Cao
Cheapest-to-delivery Bond
The cheapest-to-delivery bond is the one
for which
quoted price - quoted futures price x
conversion factor
is minimized
i.e.,minimize (cash outflow - cash inflow)
27Charles Cao
Cheapest-to-delivery Bond,Example
The current futures price is $93-08 ($93.25),
The party with the short position decided to
deliver the bond,There are three bonds
available for delivery
Bond
1
2
3
Quoted Price
99.50
143.50
119.75
Conversion Factors
1.0382
1.5188
1.2615
28Charles Cao
Cheapest-to-delivery Bond,Example
The cost of delivering each bond is:
bond 1,99.50 - 93.25 x 1.0382 = 2.69
bond 2,143.50 - 93.25 x 1.5188 = 1.87
bond 3,119.75 - 93.25 x 1.2615 = 2.12
The cheapest-to-delivery bond is bond 2
29Charles Cao
The Wild Card Option
T-bond futures (CBOT),market closes at
2:00 p.m
T-bond,market closes at 4:00 p.m
The party with the short position has the
option to make delivery decision by 8:00
p.m
If decide to deliver,the settlement price
is 2:00 p.m,price
30Charles Cao
The Wild Card Option
If the price declines after 2:00 p.m.,he
will decide to deliver the bond and buy
the cheapest-to-delivery bonds for
delivery
If the price increases after 2:00 p.m.,
he can wait until the next day
The wild card option is not free
31Charles Cao
The Wild Card Option
The wild card option price is already
reflected in the futures prices,which is
lower than it would be without the
option
32Charles Cao
The Pricing of T-bond Futures
Pricing T-bond futures is difficult
because we do not know the timing of
the delivery and the choice of the bond
Assume the cheapest-to-delivery bond
and the delivery date is known
33Charles Cao
The Pricing of T-bond Futures
T-bond futures contract is a contract on
a security with known income,thus
)tT(re)IS(F
where I is the present values of coupons
during the life of the contract
34Charles Cao
The Pricing of T-bond Futures
The procedure:
1,Calculate cash price of the cheapest-to-
delivery bond from quoted price
2,Calculate cash futures price from cash
bond price
3,Calculate the quoted futures price from
the cash futures price
35Charles Cao
The Pricing of T-bond Futures
4,Divide the quoted futures price by the
conversion factor to allow for the
difference between the cheapest-to-
delivery and the standard 15-year 8%
bond
36Charles Cao
The Pricing of T-bond Futures,Example
The cheapest-to-delivery bond is 12% coupon
bond with a conversion factor of 1.4
Delivery will take place in 270 days
Coupon is paid every 6 months ($6),and the
last payment was 60 days ago
The next coupon date is in 122 days
The next-but-one coupon date is in 305 days
37Charles Cao
The Pricing of T-bond Futures,Example
The risk-free rate is 10%
The quoted bond price is $120
Time Chart for the Example
Coupon
payment
Coupon
payment
Coupon
payment
Current
time
Maturity
of futures
contract
60
days
122
days
148
days
35
days
182 days 183 days
270 days
305 days
38Charles Cao
39Charles Cao
The Pricing of T-bond Futures,Example
The cash price of the bond is:
The PV of the coupon is:
80356 36512210,eI /,
9 7 81 2 161 8 2601 2 0,$
40Charles Cao
The Pricing of T-bond Futures,Example
The futures price is:
At delivery,there are 148 days (270-122)
of accrued interest,The quoted futures
price is:
0941258035978121 36527010,e)..(
e)IS(F
/.
)tT(r
2 4 21 2 061 8 31 4 80 9 41 2 5,$,
41Charles Cao
The Pricing of T-bond Futures,Example
Since the futures contract is written on
a standard 8% coupon bond,and 1.4
standard bonds are equivalent to each
12% bond,The quoted futures price is:
8 8 78541 2 4 21 2 0,.,?
42Charles Cao
Treasury Bill Futures
The underlying asset is a 90-day T-bill
The party with the short position should
deliver $1 million of T-bill on any of
three successive business days
The first delivery day is the first day of
the delivery month on which a 13-week
T-bill is issued and a 1-year T-bill has
13-week remaining to maturity
43Charles Cao
Treasury Bill Futures
The T-bill should have about 90-day to
expiration when it is delivered
The T-bill is a discount instrument
It pays no coupons,and the investor
receives the face value at maturity
44Charles Cao
Treasury Bill Futures,Example
The futures contract matures in T years
The T-bill underlying the futures
contract maturities in T*
T* - T ~ 90 days
r,interest rate for risk-free investment
maturing at T
45Charles Cao
Treasury Bill Futures,Example
r*,interest rate for risk-free investment
maturing at T*
The face value of the T-bill is 100
V,the price of a T-bill maturing at T
V*,the price of a T-bill maturing at T*
rTeV 100
TreV 1 0 0
46Charles Cao
Treasury Bill Futures,Example
The current value of the T-bill underlying the
futures contract is V*,and no income is paid
on the T-bill,thus
V
V
e
e
ee
eVF
rT
Tr
rTTr
rT
100
100
100
47Charles Cao
Implied Repo Rates
The interest rate at which an investor can
borrow by selling securities to a financial
institution and agreeing to buy them back
at a higher price
The financial institution does not take any
risk
It is considered as the risk-free rate
It is very close to the T-bill rate
48Charles Cao
Implied Repo Rates
It is the interest rate implied by V* and
F
If the rate of the T-bill maturing at T is
significantly different from the implied
repo rate,it indicates arbitrage
opportunity
49Charles Cao
Implied Repo Rates
Since
We have
VVF
100
F
V
e
F
V
V
rT
1 0 01 0 0
1 0 0
50Charles Cao
Implied Repo Rates
Thus
F
VlnrT
F
Vln
T
r 1
This is the implied repo rate
and
51Charles Cao
Eurodollar Futures
Short-term interest rate futures contract
One of the most active contracts
Traded on the Chicago Mercantile
Exchange (CME) and the London Int’l
Financial Futures Exchange (LIFFE)
A Eurodollar is a dollar deposited in a
U.S,or a foreign bank outside the U.S
52Charles Cao
Eurodollar Futures
The Eurodollar rate = 3-month LIBOR
LIBOR,London Interbank Offer Rate
The Eurodollar rate is higher than the
corresponding T-bill rate
The Eurodollar rate is a commercial
lending rate
T-bill rate is the rate at which the
government borrows (no default risk)
53Charles Cao
Eurodollar Futures
The Eurodollar futures contract is
similar to that of the T-bill futures
One major difference
T-bill futures,the contract price
converges to the price of a 90-day $1
million face value
Eurodollar futures,settled in cash
