Question

a Eurodollar futures quote is 96.28 for a contract maturing in 12 months, and the 12-month LIBOR interest rate is 3% with continuous compounding.

1. If the 3-month LIBOR in 12 months were 3.15%with continuous compounding, what would be the payoff in 12 months from selling two Eurodollar futures contract today?
2. Calculate the LIBOR forward interest rate for the 12-month to 15-month period, Ignore convexity adjustments.

Answer 1

Eurodollar futures prices are expressed numerically using 100 minus the implied 3-month LIBOR.

The contract mentioned in the question implies that it is a contract for 3 months LIBOR, starting in 12 months. The contract matures in 12 months when the 3 months period of the underlying LIBOR begins. Hence, the LIBOR forward interest rate for 12 months to 15 months period is 100-Eurodollar price= 100-96.28= 3.72%
If the 3 months LIBOR in 12 months were 3.15%, the price of Eurodollar is 100-3.15= 96.85
The payoff will be as follows-
Change in Eurodollar price= 96.85- 96.28
=0.57
= 57 basis points
Each Eurodollar contract is for a notional principal of $1 Mn and a change of 1 basis point implies a change of $25 in each contract. Hence, for 2 contracts a change of 57 basis points will imply a gain=
=2*57*25
2850