Question

The table below shows the offered rates for deposits with maturities ranging from 1 to 6 months for January 16. Deposit Rates, January 16, 2020 Maturity Offered (months) rate 2.30 2.35 2.40 2.45 2.50 2.55 1. Using these rates, find the fair value of forward LIBOR for the 3-month period beginning Monday March 16. 2. What is the fair value of a March Eurodollar futures contract, which expires on Monday, March 16? 3. If the March Eurodollar contract is trading at 97.70, is it rich or cheap? How many ticks?

Answer 1

Part (1)

(1 + 2.35% x 2/12)(1 + R x 3 / 12) = (1 + 2.50% x 5 / 12)

Or, 1.0039 x (1 + 0.25R) = 1.0104

Hence, the fair value of the forward LIBOR for 3 month period = R = [1.0104 / 1.0039 - 1] / 0.25 = 2.59%

Part (2)

Fair value of the future contract = 100 / (1 + 2.35% x 2 / 12) = $ 99.61

Part (3)

Since the traded price = $ 97.70 < $ 99.61 = the fair value of the future contract, it's trading cheap. And it's cheap by 99.61 - 97.70 = $ 1.91 = 191 ticks.