Explanation:
A quote of 97.00 implies a Eurodollar futures rate of 3.00%.
For a 4-year contract with only 1.0% volatility, the convexity adjustment is very small, so after converting to a continuously compounded equivalent, the adjusted forward rate is still closest to 2.99%.
So the best answer is C.
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Question 172.6. The four (4)-year Eurodollar futures quote is 97.00. The volatility of the short-term interest rate (LIBOR) is 1.0%, expressed with continuous compounding. What is the equivalent forward rate, adjusted for convexity, given in ACT/360-day count with continuous compounding (i.e., the Eurodollar futures contract gives LIBOR in quarterly compounding ACT/360, so convert to continuous but a day count conversion is not needed)?
A
2.90%
B
2.95%
C
2.99%
D
3.00%