Posted by
Xavier.Abulker on
Feb 14, 2003; 12:49am
URL: http://quantlib.414.s1.nabble.com/Interest-Rate-Futures-tp2403p2404.html
Hi Andrea,
I can only answer to the first part of the question:
Is that true?
Yes, this is because of the difference in the nature of Futures and FRA
contracts.
Usually one say that it is unappropriate to use future prices directly in
yield curve constructions the future rate must be adjusted such that
future rate = forward rate + convexity adjustement.
In theory it is possible to make an arbitrage in buying a FRA and selling
the same number of future contracts, the model of convexity adjustment
consists of finding the required fixed rate of a fra such that this
arbitrage is not possible.
The problem now is that to calculate this convexity adjustement you need:
- correlations between all futures contracts
- Volatility of future conctracts.
Maybe I'm wrong but what I've seen is that market participants are ignoring
it because it's too complex to measure.
(If you have an accurate idea of the correlation between 3m and 12m futures
contracts tell me!)
Of someone else has another point of view I'd be happy to read it.
Bye
Xavier
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eforge.net Subject: [Quantlib-users] Interest Rate Futures
14/02/2003 09:13
Hi, I would like to ask you something
I have some little problem bootstrapping a term structure using future
rates, so I tried to understand something about them...
I read Hull about 3 months EURIBOR interest rate futures and I read that a
future price of Z does not imply that the forward interest rate for the 3
months following the expiry date is 100-Z because of convexity adjustment.
Is that true? And if it is, how does the class FutureRateHelper handle it?
thanks
andrea
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