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Hi David,

Sorry, but I’ve got another question if you’ve got some spare time, this time relating to Eurodollar futures. No urgency though, it’s more curiosity than anything else.

When pricing a future we have a combination of equations depending on the underlying which results in a combination of slightly different pricing equations of something in the form of F=So.e^rt …… nice and easy….

Now when we price a Eurodollar Future we use the formula.

F = 10,000[100 - 0.25(100-Q)]

I was a bit curious about this formula and why it is so, I reworked it slightly to get:

F=1000000[1 – 90/360 (1-q/100)) or

F=1000000[1 – 0.25 (1-q/100)) where I think the (1-q/100) part converts a quote of say 98 to 2% ….. i.e. (1-98/100) = (1-0.98) = 2%

So the way I’m looking at it, is that the futures price is actually the discount of the principle, multiplied by the Eurodollar interest rate converted to 3 months (90/360). Or in other words the discount of the principle due to the cost of money for 3 months.

So assuming that is correct, I finally get to my questions: is this effectively just looking at a

Thanks,

Paul

Sorry, but I’ve got another question if you’ve got some spare time, this time relating to Eurodollar futures. No urgency though, it’s more curiosity than anything else.

When pricing a future we have a combination of equations depending on the underlying which results in a combination of slightly different pricing equations of something in the form of F=So.e^rt …… nice and easy….

Now when we price a Eurodollar Future we use the formula.

F = 10,000[100 - 0.25(100-Q)]

I was a bit curious about this formula and why it is so, I reworked it slightly to get:

F=1000000[1 – 90/360 (1-q/100)) or

F=1000000[1 – 0.25 (1-q/100)) where I think the (1-q/100) part converts a quote of say 98 to 2% ….. i.e. (1-98/100) = (1-0.98) = 2%

So the way I’m looking at it, is that the futures price is actually the discount of the principle, multiplied by the Eurodollar interest rate converted to 3 months (90/360). Or in other words the discount of the principle due to the cost of money for 3 months.

So assuming that is correct, I finally get to my questions: is this effectively just looking at a

**future**3 months Eurodollar interest rate which is what is used to define the quote price? And also since the Eurodollar is the rate banks borrow to each other, what are the differences between the Eurodollar and LIBOR – are they interchangeable?Thanks,

Paul

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