Question: The 5-month LIBOR rate is 3%, and the 2-month LIBOR rate is 2%, on the basis of continuous compounding and 365 days a year a)

The 5-month LIBOR rate is 3%, and the 2-month LIBOR rate is 2%, on the basis of continuous compounding and 365 days a year

a) Estimate the 3-month Eurodollar futures price quote for a contract maturing in 2 months. (1 mark)

b) If the Eurodollar futures price quote is 97, how would you arbitrage? Just state your transactions in the futures contract, the 5 month rate and the 2 month rate. (1 mark)

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