Question

Assume that you observe the following prices in the T-Bill and Eurodollar futures markets

	T-Bill	Eurodollar
September	95.24	94.6

a. If you expected the TED spread to narrow over the next month then an appropriate strategy would be to do what long or short and why?

b. Assume that a month later the price of the September T-Bill future is 96.25 and the price of the Eurodollar future is 95.9. Calculate the profit on the T-Bill futures position.

c. Assume that a month later the price of the September T-Bill future is 96.25 and the price of the Eurodollar future is 95.9. Calculate the profit on the Eurodollar futures position.

Answer 1

a. If the spread narrows over the next month, then it is appropriate to take long with the least priced and short with highest priced. That is, in that case, it is better to long with the Eurodollar futures and short with the T-Bill futures.

b. One month later,

Price of T-Bill futures is 96.25

Price of Eurodollar is 95.9

The profit on T-Bill futures is :Long -96.25, short-95.24 resulting in the loss of 1.01.

c.The profit on Eurodollar futures is: Long-94.6, short-95.9 resulting in profit of 1.3.