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FRM Part I · FRM Exam Part I · Interest Rate Futures

A Eurodollar-style futures contract is quoted at 96.50. Using the standard convention that the contract price is 100 minus the annualized three-month rate, what is the implied three-month rate, and what is the change in the contract's value if the quote rises by one basis point, given a $1 million notional?

The implied three-month rate is 3.50%, and a one basis point rise in the quote increases the contract value by $25. The tick value is notional times 0.0001 times three-twelfths. A higher quote means a lower rate, which benefits the long.

  1. A3.50%; contract value rises by $25Correct
  2. B3.50%; contract value falls by $25
  3. C3.50%; contract value rises by $100
  4. D96.50%; contract value rises by $25

Explanation

Implied rate = 100 - 96.50 = 3.50%. One basis point is 0.0001 x $1,000,000 x 3/12 = $25. A higher quote means a lower rate, so the long gains $25. Falling by $25 gets the sign wrong, $100 omits the quarter-year fraction, and 96.50% misreads the quote as a rate.

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