![]() Research REIN Miami Request Information.Research REIN Jacksonville Request Information. ![]() Research REIN Birmingham Request Information.Research REIN Atlanta Request Information.As a result, the pricing of FRAs is very competitive and bid-ask spreads are very narrow as arbitrage opportunities keep prices in the two markets very closely aligned. In hedging the sale of a forward contract with futures, the marking to market feature of futures must be considered. These banks hedge the risk of these products by using Eurodollar futures. FRAs are customized contracts that can be obtained through investment banks. These contracts allow a firm to replace floating interest rates with fixed interest rates or vice-versa. ![]() This module demonstrates the close linkage of the FRA and Eurodollar futures market. This implies a three basis point arbitrage profit. Thus, one might consider an arbitrage transaction by investing in the third option at 0.83% and funding that investment by borrowing outright at the term six-month rate of 0.80%. The third alternative provides a slightly greater return of 0.83% than does the first or second investment options with returns at 0.80%.Įurodollar futures prices reflect IFRs in the FRA market because of the possibility that market participants may pursue arbitrage opportunities when prices become misaligned. This implies a return of 0.800% over the entire six-month period. The second investment option implies that you invest at 0.700% for the first three months and lock in a rate of 0.900% by buying March Eurodollar futures covering the subsequent three-month period. The return on the first investment option is simply the spot six-month rate of 0.800%.
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