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FRM-1 Study Notes

Futures price

  • In a treasury futures contract the price of the bond is not easy to deliver because the cheapest to deliver bond is not known
  • However, if the cheapest to deliver bond and its delivery date is known we can call upon the equation which considers discreet payouts from an underlying and can be given as below:
    • F0 = (S0-I) ert

Eurodollar Futures:

  • A Eurodollar is a dollar deposited in a foreign bank/US bank outside the United States
  • Eurodollar futures are futures on the 3-month Eurodollar deposit rate (same as 3-month LIBOR rate)
  • Long position => agrees to give a loan at the determined price
  • One contract is on the rate earned on $1 million
  • A change of one basis point or 0.01 in a Eurodollar futures quote corresponds to a contract price change of $25 (1mm * 0.01% * 90/360)
  • When it expires (on the third Wednesday of the delivery month), final settlement price is 100 minus actual three month deposit rate.
  • Contract Price = 10,000*[100 – 0.25*( 100 – Q)]
    • Q = Quoted Price

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