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Assume an individual is a buyer, i.e., long, of one Forward Rate Agreement and a seller, i.e., short, of one Eurodollar Futures contract. Does the collective portfolio have positive or negative convexity? Why?

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Is that a CFA question? Please show us what you've thought about the answer and where you get stuck. – SRKX May 9 '14 at 9:13
It's not for the CFA. Here's what I think so far: If someone is the long party on a Forward Rate Agreement, they make or receive one lump sum payment at the end of the period; They will receive a lump sum payment if the floating rate exceeds the agreed-upon fixed rate. The short party in a Eurodollar futures contract also receives payment when floating rates, i.e., Libor, rise. However, these futures are marked-to-market daily, and so I believe there will be positive convexity due to receiving more cash in the margin account when rates are higher and less when they are lower. Is this right? – user8022 May 13 '14 at 17:10

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