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How are Eurodollar futures priced in practice?

What I already know: The implied 3 Months rate by the futures is 100-price, since it matches the payoff. Using daily LIBOR rates, one should be able to estimate the forward rate between $T$ and $T + 3Months$, where $T$ is the expiration of the nearest Eurodollar futures.

At first I assumed that the Eurodollar implied rate should be very close to forward rate, which is not. I have find something about convexity adjustments, however I am not able to get a formula which would be even a remote approximation of real market price.

Edit: Adding example. Suppose that closing price of ED futures is 98.00, thus the 3M implied rate is 2%. Whereas current 3M rate is 1.5% and 3M forward rate implied from the yield curve is at 1.8%. Thus the 0.2% difference in pricing is the adjustment by convexity bias. My question is, how to calculate the convexity bias without looking at market data. Is there any reason, why it is 0.2% and not, let's say, 0.5%?

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  • $\begingroup$ Eurodollar futures prices are quoted as 100 minus the implied 3-month U.S. dollar LIBOR interest rate. A eurodollar futures price of USD 98.00 reflects an implied settlement interest rate of 2%. Could you include a numerical example to illustrate the issue you are facing? $\endgroup$ – byouness Jul 12 at 16:39
  • $\begingroup$ This post explains very well why a convexity adjustment is needed and how ED futures relate to FRAs: quant.stackexchange.com/questions/45787/… $\endgroup$ – oronimbus Jul 13 at 11:10
  • $\begingroup$ @byouness added example ilustrating my problem $\endgroup$ – Johny Jul 14 at 11:15
  • $\begingroup$ @oronimbus Thanks for the link, it has helped very much explaining why is there convexity bias, however I am not able to calculate the bias from it. $\endgroup$ – Johny Jul 14 at 11:17

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