The Time-To-Maturity of a Eurodollars Futures Contract Is 4 Years $\sigma$

question 4

Multiple Choice

The time-to-maturity of a Eurodollars futures contract is 4 years, and the time-to-maturity of the rate underlying the futures contract is 4.25 years. The standard deviation of the change in the short term interest rate, $\sigma$ = 0.011. What is the difference between the futures and the forward interest rate.

• A) 0.105%
• B) 0.103%
• C) 0.098%
• D) 0.093%

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Definitions:

Substitution Effect

Alterations in spending behaviors triggered by variations in the prices of goods relative to each other, prompting individuals to replace one item with an alternative.

Output Effect

The change in total output resulting from adjusting production levels, typically in response to changes in market demand or cost of production.

Fixed Proportions

A production process where inputs must be used in specific proportions, and the ratio of inputs cannot be easily changed.

Substitution Effect

The change in consumption patterns due to a change in relative prices, causing consumers to substitute one good for another more price-friendly option.