Convexity Adjustment (Eurodollar Futures)
1. Context
In this video that FRM Part I candidates will find of interest, we explore the concept of Convexity Adjustment as applied to Eurodollar Futures, the origins of this adjustment and how this adjustment can be determined. The convexity adjustment causes interest rates implied from futures prices to differ from forward interest rates, with the difference accounting for the systematic gain that hedgers using Eurodollar futures make relative to hedgers using Forward Rate Agreements (FRAs). This systematic gain is on account of the earlier settlement of futures compared to forwards and the daily mark-to-market of futures contracts (a feature that is not available in case of FRAs). This video is extracted from the FRM Part 1 preparation course. The details of the reading in which this topic appears are given below:
| Area | Financial Markets and Products |
| Reading | Interest Rate Futures |
| Reference | Chapter 19. Interest Rate Futures In GARP Official Books (FRM Part I, FMP section) (GARP, 2020). |