Eurodollar futures convexity adjustment

[higaurav]

Hi David,

I was trying to solve this question posted by you on blog sometime back.

Q Eurodollar futures convexity adjustment – Practice question (Par 4 difficulty).The four (4) year Eurodollar futures price quote = 95 (pretty near to actual).Volatility of the change in short-term interest rate = 2%

I am not able to understand the mechanics of the solution. Please can you advice me on which screen cast should I be looking at, in order to understand the related concepts?

Thnks
OM

 

[David Harper CFA FRM]

Hi OM,

Here is 5 min brief on the convexity adjustment for Eurodollar futures (not to be confused with bond convexity). The assigned source is Hull Chapter 6, but frankly, if there is an intuition to it, i am not awares. It is the Ho-Lee method, and there are other to treat the approximation. In practical terms, i think it just needs to be memorized

...David