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Eurodollar futures and forwards

  • In a Eurodollar futures contract that locks in an interest rate between times T1 and T2 the interest rate is locked in at time T1 and the settlement is made at time T1
  • In an FRA which also locks in an interest rate between times T1 and T2, the final settlement is made at time T2
  • Difference between Eurodollar futures and FRA
    • In an FRA the payoff is equal to the difference in the forward interest rate and the realized interest rate
    • The settlement is at time T1 for the E-futures contract while its at time T2 for the forward contract
    • Analysts adjust forward rates with the following equation:
  • σ is the standard deviation of the change in the short term interest rate in 1 year





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