Joey - what are your thoughts on valuing a t-bill from the eurodollar curve? I imagine there would have to be a very slight convexity adjustment as well as a day count conversion. Does this make any sense in the first place?
The T-bill/eurodollar spread is called the TED spread. It’s generally a measure of something like global political/infrastructure risk. There was really money to be made playing the TED spread for Y2K for instance when people thought that Y2K was going to melt down global banking (yeah, sure). If the world is going to heck in a handbasket you want your $ in instruments guaranteed by the US govt not in an overseas bank. On a lighter level, you can think of the spread as a credit spread between risk-free T-Bills and AA eurodollar deposits.
And while I’m thinking about it - so CFAI doesn’t teach anything about risk-neutral valuation which means that you can’t get a decent framework on valuing derivatives even though you can reasonably talk about derivatives using words like “quadrillion dollars”. But if they did, you can give a really nice statement about the difference between forward prices and futures prices. The forward price - futures price = e^(rT)*Cov(interest rate, underlier) where covariance is calculated under risk-neutral measure, “interest rate” is [blah], girsanov, blah, blah… It’s kind of interesting to me that the popularity of MFE programs and CFA seem to be growing in tandem except that MFE programs are fabulously more expensive. Why can’t we have a similar charter that covers this kind of stuff which seems so much more important than, for example, learning about pooled interest accounting which is now not generally legal. It’s pretty amazing that there is such a mystique about this stuff that people are willing to take a year off work and pay $50,000 in tuition to learn something that is only mathematically more sophisticated than most CFA stuff but not especially more difficult.
Hi
what does BO and FO mean?