Comparing Convexity of a Long FRA and Short Eurodollar Future

Summary

The document poses a fixed-income derivatives question: whether a portfolio consisting of a long forward rate agreement and a short Eurodollar futures contract has positive or negative convexity. It asks for an explanation of the portfolio’s exposure, but provides no answer, derivation, market assumptions, or numerical example.

The topic concerns the difference between forward rates embedded in an FRA and futures-implied rates, including how daily settlement affects the futures contract’s value as rates change. Determining the combined convexity would require specifying contract conventions, the relevant rate dynamics, and the valuation framework. Since the source contains only the question, it offers no evidence or conclusion about the sign or magnitude of the portfolio’s convexity.

Key ideas

• The portfolio pairs a long forward rate agreement with a short Eurodollar futures contract.
• The question asks for the sign and explanation of the combined convexity.
• The document gives no answer, derivation, or assumptions for resolving the exposure.

Tags

# Convexity of Portfolio Containing Eurodollar Future and Forward Rate Agreement


# Convexity of Portfolio Containing Eurodollar Future and Forward Rate Agreement












Assume an individual is a buyer, i.e., long, of one Forward Rate Agreement and a seller, i.e., short, of one Eurodollar Futures contract. Does the collective portfolio have positive or negative convexity? Why?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.