Los 48 g

CFA Level II Derivatives
#1

I’m not very clear about this Los. Could anyone please help me in this regard. Thanks in advance.

#2

LOS 48g: Describe the difficulties in pricing Eurodollar futures and creating a pure arbitrage opportunity.

You need to know that Eurodollar futures are priced using a discount rate (the same way that US Treasury bill futures are priced), but that the underlying Eurodollar deposits earn an add-on rate, not a discount rate. Therefore, it’s impossible to create a perfect arbitrage transaction: the futures are priced as if a one-tick price change is worth $25 at the expiration of the futures contract, but the price of the 90-day Eurodollar deposit will change by $25 _ 90 days after the expriation of the futures contract _.

#3

Thanks a lot a Sir

#4

Great explanations!!

#5

You’re welcome.