RELATIVE PRICING OF EURODOLLAR FUTURES AND FORWARD CONTRACTS

Past research explains observed spreads between futures and forward Eu rodollar yields as being due to the futures contract's mark-to-market feature. We derive closed form solutions for this yield spread and sho w that, theoretically, it should be small. Also, differences in liquid ity, taxation, and default risk cannot account for the large spreads o bserved. We also present evidence that the spreads, which are nonnegli gible primarily in the first half of the sample period, are likely to be attributable to the mispricing of futures contracts relative to the forward rates and that the mispricing was gradually eliminated over t ime.