00:01
So i want to compare the three to six month forward rate from today's term structure with the rate implied by the euro dollar futures.
00:07
If the futures implied rates higher, borrow six months and lend three in three months, locking the second three months with the long euro dollar futures, earning an arbitrage spread.
00:20
So if the 90 -day rate is 10%, and the 180 -day rate is 10 .2%, and t1 would be 9%.
00:32
90 days out of the 365, t2 is 180 out of the 365, then the forward rate for 90 to 100 days would be r2, which is 0 .102 as a decimal, 10 .2 % for 180 out of 365 minus 0 .10 times 90 out of 365 over 90 over 365 and that's equal to 0 .104 which is 10 .4 percent convert the three -month lebor used by your dollar future so the period effectiveness would be e to the 0 .104 times 904 out of 365 minus 1, which is 0 .025975.
01:35
So that would be four times 0 .025975, which is about 10 .39%.
01:56
Then the eurodollar futures price is at 89 .5, with an implied rate of 100 minus 89 .5, which is 10 .5%.
02:06
And since 10 .5, 0 .5 % is more than 10 .39%.
02:12
The futures imply 3 to 6 month rates too high.
02:16
So the arbitrage today, borrow for 180 days at 10 .2%, lend for 90 days at 10%.
02:25
You go along one euro dollar futures, which locks lending for days 90 to 180 at 10 .5 % simple...