Fixed Income and Interest Rate Derivative Analysis

FORWARD RATES, T-BILL FUTURES, AND QUASI-ARBITRAGE 51

This analysis simplifies from reality in two ways. First we have assumed

away timing problems. In reality we are unlikely to be precisely 3 months

away from the next maturing futures contract This problem is easily dealt

with. If the next futures contract expires in say 2 months we simply buy a

T-bill that will mature then. We thus would purchase a 2 month T-bill at a

price of B(0, 2/12).

The second departure from reality is the assumption that the futures

contract can be modelled as if it were a forward contract ...