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Answer: 2.99%
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**.
Author: Manit Arora
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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%
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