2. Short-term Credit and Price Risk. While we say US Treasuries (USTs) are risk-free, this is not true for moncy depositod in a bank: That bank can fail. Eurodollar futures can be used to hedge the rate paid for large US dollar deposits in a top-credit London bank. rate is called LIBOR, the London Interbank offered Ratc.) Eurodollar futures are some of the most actively-traded instruments in the world. Because banks and finance firms often anticipate cashflows well into the future, Eurodollar futures are not just liquid for a few maturities for many maturities For this question, you should look at "near" Eurodollars (EDI) which are used to hedge three- month rate risk and Eurodollars about two-years out (ED24 (a) Since Eurodollar futures trade at prices (not yields), we can easily calculate daily log- (4) returns for them. Using these daily log-returns, calculate a standard deviation and semi deviation for each maturity. These are estimates of daily log-return volatilities and semi- remembering that there are about 250 nnual basis deviations. Scale them up to an a trading days/year). Report the scaled-up volatilities and semi-deviations. (4) (b) Again using the daily log-returns, calculate a and kurtosis for each maturity These estimates are time-independent, so they do not need to be scaled to an annual basis. Report the skew messes an d kurtoscs. (c) Compare the volatilities semi-deviations, skewnesses, and kurtoses of these Eurodollar (8) contracts to the volatilities of similar-term CMTs. How different are these risk measures Why would this be? You cannot write one sentence for this and expect many points. I want direct comparisons and possible explanation (d) Now we will examine a credit spread. The TED spread is the amount that short-term (4) Eurodollars (the "ED" in TED) yield over a similar-term US Treasury instrument (the "T" in TED). To compute what 3M Eurodollars are yielding, just subtract their price average time of a bond's cashflows. We'll get to that later. These numbers are related to t 2. Short-term Credit and Price Risk. While we say US Treasuries (USTs) are risk-free, this is not true for moncy depositod in a bank: That bank can fail. Eurodollar futures can be used to hedge the rate paid for large US dollar deposits in a top-credit London bank. rate is called LIBOR, the London Interbank offered Ratc.) Eurodollar futures are some of the most actively-traded instruments in the world. Because banks and finance firms often anticipate cashflows well into the future, Eurodollar futures are not just liquid for a few maturities for many maturities For this question, you should look at "near" Eurodollars (EDI) which are used to hedge three- month rate risk and Eurodollars about two-years out (ED24 (a) Since Eurodollar futures trade at prices (not yields), we can easily calculate daily log- (4) returns for them. Using these daily log-returns, calculate a standard deviation and semi deviation for each maturity. These are estimates of daily log-return volatilities and semi- remembering that there are about 250 nnual basis deviations. Scale them up to an a trading days/year). Report the scaled-up volatilities and semi-deviations. (4) (b) Again using the daily log-returns, calculate a and kurtosis for each maturity These estimates are time-independent, so they do not need to be scaled to an annual basis. Report the skew messes an d kurtoscs. (c) Compare the volatilities semi-deviations, skewnesses, and kurtoses of these Eurodollar (8) contracts to the volatilities of similar-term CMTs. How different are these risk measures Why would this be? You cannot write one sentence for this and expect many points. I want direct comparisons and possible explanation (d) Now we will examine a credit spread. The TED spread is the amount that short-term (4) Eurodollars (the "ED" in TED) yield over a similar-term US Treasury instrument (the "T" in TED). To compute what 3M Eurodollars are yielding, just subtract their price average time of a bond's cashflows. We'll get to that later. These numbers are related to t
