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A hedging deficiency in eurodollar futures

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  • Don M. Chance

Abstract

The eurodollar futures contract of the Chicago Mercantile Exchange is arguably the most successful of all futures contracts. The contract is structured such that its price does not converge to the price of the underlying eurodollar time deposit. Ignoring the daily settlement, one typically assumes that a eurodollar futures contract perfectly hedges an anticipated loan pegged to LIBOR, provided the loan rate is set at the eurodollar expiration. This article demonstrates that this hedge is not perfect, leaving a risk empirically estimated at four basis points, a seemingly small amount but considerably larger than the bid–ask spread on the futures. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:189–207, 2006

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  • Don M. Chance, 2006. "A hedging deficiency in eurodollar futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 26(2), pages 189-207, February.
    • Handle: RePEc:wly:jfutmk:v:26:y:2006:i:2:p:189-207
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