Arbitrage oppurtunity in interest rate futures

Ondin · February 27th, 2007, 4:01 pm

Hi there, anyone who can answer this one?Assume that a bank can borrow or lend money at the same interest rate in the LIBOR market. The 90-day rate is 10% per annum, and the 180-day rate is 10,2% per annum, both expressed with continous compounding and actual/actual day count. The Eurodollar futures price for a contract maturing in 91 days is quoted as 89,5. What arbitrage opportunities are open to the bank?Kind regards,Bragi

MrMartingale · February 27th, 2007, 7:31 pm

Bra, bra, bra !8-)

richbrad · February 28th, 2007, 8:00 am

Ondin,(This is a rhetorical question)What does the Eurodollar futures price imply about the forward 3 month interest rate? - this basically gives you the solution to the fairly simple problem.