Arbitrage between the spot and futures markets for eurodollars

Quarterly Bulletin 1985 Q4
Published on 01 December 1985

This article examines whether the futures market for eurodollars in London operates efficiently, in the sense that prices adjust so as to eliminate opportunities for profitable arbitrage between the spot and futures markets. Statistical analysis is reasonably conclusive in giving an affirmative answer. The article also describes how neither interest rates available on the futures market nor implied forward rates derived from the spot market provide precise measures of current market expectations of future spot interest rates, because liquidity and risk considerations influence behaviour in these markets. Such considerations help to explain the relationship between prices in the two markets.

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