The Convexity Bias Between FRAs and Eurodollar Futures Implies That

question 23

Multiple Choice

The convexity bias between FRAs and eurodollar futures implies that

• A)The futures results in greater cash outflows or smaller cash inflows than the FRa.
• B)The futures settlement amount is convex in Libor rates.
• C)The futures results in greater cash inflows or lower cash outflows than the FRA.
• D)The FRA payoff minus the futures payoff is convex in Libor rates.

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Definitions:

Preferred Shares

Type of equity security that offers dividends and other benefits before common stockholders are compensated, often with no voting rights.

Rate of Return

The rate of return is the percentage of gain or loss on an investment over a specified time period, comparing the initial investment cost to the final value.

Floatation Costs

Fees and expenses associated with issuing new securities in the market, including underwriting, legal, registration, and printing fees, which can impact the net proceeds to the issuer.

Floatation Costs

Expenses incurred by a company when it issues new securities, including underwriting fees, legal fees, and registration fees.