Relative Pricing of Eurodollar Features and Forward Contracts

Mark Grinblatt and Narasimhan Jegadeesh

Journal of Finance, 1996, vol. 51, issue 4, 1499-1522

Abstract: Past research explains observed spreads between futures and forward Eurodollar yields as being due to the futures contract's mark-to-market feature. The authors derive closed-form solutions for this yield spread and show that, theoretically, it should be small. Also, differences in liquidity, taxation, and default risk cannot account for the large spreads observed. The authors also present evidence that the spreads, which are nonneglible primarily in the first half of the sample period, are likely to be attributable to the mispricing of futures contracts relative to the forward rates and that the mispricing was gradually eliminated over time. Copyright 1996 by American Finance Association.

Date: 1996
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