Pricing Eurodollar/Euribor Futures Using Preference-Free Multifactor Affine and Quadratic Models
Posted: 7 May 2007 Last revised: 15 Aug 2019
Date Written: May 1, 2007
This paper derives analytical solutions for valuing Eurodollar/Euribor futures using multifactor affine and quadratic models. We use a preference-free framework independent of the market prices of risk. The preference-free "single-plus" models allow the short rate process to be time-homogeneous. The preference-free "double-plus" models allow the short rate process to be time-inhomogeneous, such that the model prices are consistent with initially observable bond prices. Our solutions allow arbitrary number of factors for the short rate and nest virtually all other solutions given in the literature. We also solve the convexity-bias in closed-form under various multifactor affine and quadratic models.
Keywords: Eurodollar futures, Euribor futures, Interest rate models, Term structure models, Affine, Quadratic, Convexity bias
JEL Classification: G11, G12, G13, G21, G22, G23
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