I don’t understand why it is not possible to construct a risk free arbitrage strategy for mispriced eurodollar futures. Does anybody have a good explanation for this? Mike
different methods of conversion between the Eurodollar leg and the LIBOR leg which it is supposed to help hedge against. 1/(1+x*N/360) -> for the LIBOR leg 1/[(1+x)^N/360] for the Eurodollar future leg. you will never find a matching x that satisfies both of the above equations simultaneously. nevertheless - this instrument is present, available and used to imperfectly hedge.
thanks. exactly what i was looking for.
Thanks for your answer. However, I’ve also found in this forum another reason:
" This is because the add on yield does not change (think of the rate on a CD) whereas T-Bill rates do change."
Could someone please help me understand if that rationale is different from the math above? I don’t seem to be able to understand what that last explanation means using some basic example.
…maybe, but the difference between the two formulas is too small for any impact on arbitrage I think.