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The Eurodollar Futures and Options Handbook by Galen Burghardt

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CHAPTER 8Convexity Bias Report Card

Galen Burghardt, William Hoskins, and Niels JohnsonResearch note originally released April 15, 1997

The purpose of this note is to review the performance of the convexity bias estimates and to introduce the “convexity bias greeks.”

WHAT IS THE CONVEXITY BIAS?1

If you are long Eurodollar futures, you make exactly the same amount of money if yields fall 10 basis points as you lose if yields rise 10 basis points. In contrast, if you receive fixed on a forward position (e.g., on an FRA), you make more when yields fall than you lose when yields rise. Thus, if the Eurodollar futures rate were the same as the FRA rate, you would rather receive fixed on the FRA. To compensate for the disadvantage of being long Eurodollar ...

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