Eurodollar and its convexity

Josun

New Member
Hi,
This is the practice:1638432023372.png
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

David Harper CFA FRM
Staff member
Subscriber
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

New Member
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 ....
 
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