The following is the sample question of swap rate of reading 35 Three month LIBOR forward rates implied by Eurodollar future prices with maturity dates given in the first column. Prices are from June 2, 2004 Maturity Date Eurodollar Future price Implied Quartely Rates Swap rate (ti) (ti, t i+1) Jun-04 98.55 0.0037 1.4611% Sep-04 98.01 0.005 1.7359% … … . Mar-06 96.65 0.011 3.0808% I am confused the calculation of implied quartely rates For example, the June price of 98.555 implies a June to September quartely interest rate of (100-98.555)*91/90 *1/400 =0.0037% What is the meaning of 91/90? 90days from Mar 30 to June 2? 91 days from June 2 to Sep 30? Any one can helpe me? Thanks!
are you asking this b/c you just want to know or because you’re scared this will get tested? if #2, then i don’t think you need to worry about this b/c LOS 35a has been removed from the curriculum. the only thing you need to know from reading 35 is to “evaluate hedging strategies that rely on swaps and illustrate their inherent risk exposures”
Thank you for your reply. In fact, I want to the reason of 90/91 in the answer of this question
I think it’s a bogus attempt at a convexity adjustment. The Eurodollar futures price is not a decent estimate of forward LIBOR rates because a LIBOR loan has convexity and a ED futures doesn’t. If you are trying to estimate forward LIBOR rates you gotta do some math.
91/90 comes from ACT/360 it is pure disc instrument so (100-98.555) = price difference for a year i guess now what is the rate? ( (100-98.555) /100 ) * (1/4) * ACT/90 ACT here is 91