Eurodollar and its convexity

[Josun]

Hi,
This is the practice:
I don’t understand why it says “both position have positive convexities”. It confused me so much that why EDF has the positive convexity? Isn’t it a linear product?
Thanks

 

[David Harper CFA FRM]

Hi @Josun You are correct: Eurodollar futures contract prices are a linear function of the rate such that they do not exhibit the "convexity" associated with bonds. Also, we can observe the fact that the contract changes by $25.00 per basis point, itself a constant delta. The author may be confused by the "convexity bias" which refers to the convexity (i.e., non-linearity) introduced by the forward rate agreement (FRA), compared to the equivalent ED futures contract, that is due to the daily settlement (re-investable cash). So I stopped reading your question at that point ....

 

[Josun]

Thank you so much, David.

Hi @Josun You are correct: Eurodollar futures contract prices are a linear function of the rate such that they do not exhibit the "convexity" associated with bonds. Also, we can observe the fact that the contract changes by $25.00 per basis point, itself a constant delta. The author may be confused by the "convexity bias" which refers to the convexity (i.e., non-linearity) introduced by the forward rate agreement (FRA), compared to the equivalent ED futures contract, that is due to the daily settlement (re-investable cash). So I stopped reading your question at that point ....

 

[David Harper CFA FRM]

Sure thing, after i posted, I found this (at CME group) because (to be honest) I just wanted to confirm that wrt to the ED vs FRA convexity bias, that it is the FRA that has slight convexity bias (this bias is much smaller than the typical convexity we observe in bonds): https://www.cmegroup.com/education/...eurodollars/understanding-convexity-bias.html
... not the nice picture of a linear ED futures contract!