Why is the eurodollar future not perfectly hedged like the tbill contract? Why does it not change $25 for every basis point change in your expected 90 day libor?
Because LIBOR is an add-on rate but Eurodollar futures are priced using a discount rate, two things happen:
- The percentage price change is different from the percentage change in interest rate.
- The percentage price change is not a constant times the percentage change in interest rate; as the change in interest rate increases, the percentage price change becomes a smaller fraction of the change in interest rate.
Can you please provide an example with numbers? Thanks in advance