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Hull, J. C. (2022). Options, Futures, and Other Derivatives (11th Ed.).

Chapter 6 - Interest Rate Futures.

question 4

Description

The 350-day LIBOR rate is 3% with continuous compounding and the forward
rate calculated from a Eurodollar futures contract that matures in 350 days
is 3.2% with continuous compounding. Estimate the 440-day zero rate.

Solution

Imports

from datetime import datetime
import math
import QuantLib
import pandas as pd

Code

def solve_question_4():
    # 350-day LIBOR rate
    libor_rate = 0.03

    # Eurodollar futures' forward rate
    forward_rate = 0.032

    # Eurodollar futures' forward maturity (days)
    forward_maturity = 350

    zero_period = 440

    eurodollar_interest_earned = forward_rate * 90

    libor_interest_earned = libor_rate * forward_maturity

    accumulated_interest = eurodollar_interest_earned + libor_interest_earned

    # Estimated 440-day zero rate (%)
    zero_rate = accumulated_interest / zero_period

    return zero_rate * 100