Schweser book 5 p 46 Can somebody explain me why Eurodollar Futures do not allow an Arbitrage in contrast to T bill Futures? just gimme simple numeric example which Schweser lacks.
A please would be nice…
a T-Bill future is an discounted rate thingie a Eurodollar future is a Add-on rate. 1-r*T/100 vs. 1/(1+r*T/100) with the two - you can never find a proper rate T - that meets both equations properly and makes an arbitrage condition possible. however, the eurodollar future can be still used for hedging, so it is a useful thing to have around.
I do not have a specific example, but basically the underlying asset in a T-Bill futures contract is a 90-day T-Bill. The underlying asset in a Eurodollar futures contract is 90 day LIBOR. As we all know, LIBOR is an add on yield (rate you see on a CD for example) whereas T-Bill rates are not. This means that the Eurodollar contract is not perfectly hedged by the underlying asset as it is with a T-Bill contract. This is because the add on yield does not change (think of the rate on a CD) whereas T-Bill rates do change.
yeah sorry… i forgot abot “please”, my bad