How/can one find the SPOT 3 month interest rate for a Eurodollar loan using Eurodollar futures contracts?

Posted on 2008-11-03
Last Modified: 2011-10-03
If I gave you the last price of 3 month and 6 month Eurodollar futures (3 month loans that begin in 3 months and 6 months from now) is there a way to imply what the current (spot) 3 month Eurodollar interest rate would be?

To clarify: The Eurodollar futures contract (traded on the CME) is an actively traded proxy for 3 month LIBOR. If you subtract the futures price from 100 you get the interest rate of a 3 month loan that begins on the date the futures contract specifies. If I imported into Excel the rate of a 3 month loan starting December 15th and the rate of a 3 month loan starting March 15th how can I imply the interest rate of a 3 month loan starting now?
Question by:Dkeyte
    LVL 26

    Expert Comment

    There are many ways to do what you wish. Most of them will give you the wrong answer. The difficulty is predicting the future.

    The best way is to look up the current rate on the internet.

    The next best way is to assume a linear change
         Current rate = dec rate  (march rate  dec rate)
    You can then check the reasonableness of the linear assumption by checking the current rate on the internet (or elsewhere.)
    LVL 26

    Expert Comment

    the - sign did not go through      The odd symbol after the = sign is a - sign (minus)

    Author Comment

    Thanks for the reply. The symbols in your equation show up as boxes. Is this the correct equation?
    Current rate = Dec rate - (Dec rate - March rate)

    And it appears this gives a linear answer that I could check against the current 3 month rate. I will try this but isn't there a more advanced equation for this problem like the expectations theory or something?

    If you wanted to know the current 3 month loan rate that most big banks could borow and lend around, and intra day, how would you do it? LIBOR is only updated once per 24 hours as far as I know.
    LVL 26

    Accepted Solution

    "And it appears this gives a linear answer"\You are right
    There are more sophisticated methods but without much more innformation to put into the methods, I doubt that they are more reliable.
    I know little about banking practiced, intra day rates etc.

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