Excuse my STIR ignorance
As eurodollars near expiration, they approach spot rates. I know there is some variability as to how fast they approach spot rates, but if news and investor sentiment remains the same, do they increase in price, as expiration nears, at the same rate as if you had actually invested $1,000,000 at the spot rate?
Buy a eurodollar fut on $500 margin and hold for one month. Collect
equivalent 0.3%p.a. (what ever libor is) on $1MM.. which is $250. Close position.
A $250 gain on a $500 margin is 50% gain in one month, what am I missing?
Two things affect the rollup:
1) What is priced-in, in terms of the FOMC
2) The expectations for the spread between LIBOR and the FedFunds rate.
3) Simple risk premium
Based on the three considerations above, you have to treat each case on its own merits.