The 3-month Eurodollar futures price for a contract maturing...

The 3-month Eurodollar futures price for a contract maturing in 6 years is quoted as 95.20. The standard deviation of the change in the short-term interest rate in 1 year is $1.1 \%$. Estimate the forward LIBOR interest rate for the period between 6.00 and 6.25 years in the future.

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Key Concepts

Eurodollar Futures

Eurodollar futures are financial contracts that derive their value from the expected future value of the 3?month LIBOR rate. Their prices are quoted as 100 minus the implied interest rate, which makes them a key tool in hedging and speculating on short-term interest rate movements.

Implied Forward Interest Rates

Forward interest rates represent the market's expectation of future short-term interest rates for a specific period in the future. They can be inferred from the prices of interest rate futures such as Eurodollar contracts, linking current market prices to expectations for future borrowing costs.

LIBOR

LIBOR, or the London Interbank Offered Rate, is a benchmark rate used for setting short-term interest rates on loans in the global financial markets. It is widely used as a reference for various financial instruments, including Eurodollar futures, which are directly tied to the 3?month LIBOR rate.

Interest Rate Volatility

Interest rate volatility, often measured as the standard deviation of changes in short-term interest rates, quantifies the uncertainty or variability in future interest rate movements. In the context of forward rate estimation, this volatility can influence the pricing and convexity adjustments applied to futures contracts.

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