The Convexity Bias Between FRAs and Eurodollar Futures Implies That

question 19

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:

Misconceptions

False beliefs or misunderstandings that arise from incorrect reasoning or a lack of information.

Positive Reinforcement

The strategy of encouraging a behavior by rewarding it each time it occurs to increase its frequency.

Resistance

The act of opposing or striving against something, which can manifest in various contexts such as physical forces, social movements, or individual behaviors against change.

Emotional High

A state of intense happiness or euphoria.