Problem bank

Problem 221 of 333HardFinanceP221

Forward vs futures price with random rates

  1. The one-period rate is 4%4\% today and will be 6%6\% or 2%2\% next period, each with risk-neutral probability 12\tfrac12. An asset that pays no dividends will be worth 120 at time 2 if rates went up and 80 if they went down. Find its price today, its forward price and its futures price for delivery at time 2. Explain the gap, and say whether the Eurodollar futures rate sits above or below the corresponding forward rate.