Re: Interest Rate Futures

Posted by Ferdinando M. Ametrano-2 on Feb 14, 2003; 12:55am
URL: http://quantlib.414.s1.nabble.com/Interest-Rate-Futures-tp2403p2406.html

Hi Andrea

>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?
Oh yes, it is! Do you really think that J. Hull could be wrong? ;-)

>  And if it is, how does the class FutureRateHelper handle it?
Not yet. In any case the adjustment is very small for the first few
contracts, so that is quite common not to use it if you only include up to
4-5 contracts.

There are different approaches to the evaluation of the convexity
adjustment. I don't have the formulas handy, but there are mainly two
types. One is based on the volatility of the future contract, the other is
based on the yield term structure (evolution) model selected.

I think that FutureRateHelper should take into account the volatility of
the future contract (that is a convexity adjustment of the first type):
anyone willing to work on that?
Can anyone point to the formulas to be implemented?
Different thoughts anyone?


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ciao -- Nando