eurodollar futures

[mikecocos]

I don’t understand why it is not possible to construct a risk free arbitrage strategy for mispriced eurodollar futures. Does anybody have a good explanation for this?
Mike

 

[cpk123]

different methods of conversion between the Eurodollar leg and the LIBOR leg which it is supposed to help hedge against.
1/(1+x*N/360) -> for the LIBOR leg
1/[(1+x)^N/360] for the Eurodollar future leg.
you will never find a matching x that satisfies both of the above equations simultaneously.
nevertheless - this instrument is present, available and used to imperfectly hedge.

 

[mikecocos]

thanks. exactly what i was looking for.

 

[arorts]

Hi,
Thanks for your answer. However, I’ve also found in this forum another reason:
“ This is because the add on yield does not change (think of the rate on a CD) whereas T-Bill rates do change.”
Could someone please help me understand if that rationale is different from the math above? I don’t seem to be able to understand what that last explanation means using some basic example.
Thanks!!

 

[Dreary]

cpk123 wrote:different methods of conversion between the Eurodollar leg and the LIBOR leg which it is supposed to help hedge against. 1/(1+x*N/360) -> for the LIBOR leg 1/[(1+x)^N/360] for the Eurodollar future leg. you will never find a matching x that satisfies both of the above equations simultaneously. nevertheless - this instrument is present, available and used to imperfectly hedge.

…maybe, but the difference between the two formulas is too small for any impact on arbitrage I think.