LOS 61g, explanation?

[chasing]

LOS 61g
Describe the difficulties in pricing Eurodollar futures and creating a pure arbitrage opportunity.
Could someone clarify this for me? Eurodollar futures are priced as a discount yield and LIBOR is an add on yield?
I understand that the Eurodollar future is valued at the PV of the “expectation” of
$1
—–
1+LIBOR90 at T=x
But the sentence in Schweser says the deposit will not change $25 for every one bps change in expected 90 LIBOR in 77 days as the value of the futures contract does… confuses me.
Any clarification would be great!

 

[QuantJock_MBA]

Eurodollar futures are priced as a discount yield, and LIBOR-based deposits are priced as an add-on yield. The result is that the deposit value is not perfectly hedged by the Eurodollar contract, so Eurodollar futures can’t be priced using the standard no-arbitrage framework.

 

[eltia]

Eurodollar futures are difficult to calculate a no-arbitrage price, because the LIBOR rate is an add on rate and we will not know the LIBOR rate ahead of time.
P.S. if you have Schweser’s notes, the equation in LOS 61g in Book 5 has a component L90_{t=77}. This is the LIBOR rate that we cannot know ahead of time.

 

[SkipE99]

i disagree with the premise of this entire question. the difficulty in pricing Eurodollar futures is that nobody gives a crap about them