LIST OF EXHIBITS

PART ONE
THE EMERGENCE OF THE EURODOLLAR MARKET

Chapter 1
The Emergence of the Eurodollar Market

Exhibit 1.1 Milestones in the Development of the Dollar Money Markets

Exhibit 1.2 Inflation and 3-Month Treasury Bill Yields (1960 through May 2002)

Exhibit 1.3 Growth of the Eurodollar Market: Eurodollars Outstanding (Year-End 1973 through 2001)

Exhibit 1.4 CD Futures Volume versus Eurodollar/CD Futures Rate Spread

Exhibit 1.5 The Spread between 3-Month CD and Treasury Bill Rates (June 1964 through June 2002)

Exhibit 1.6 Average Daily Trading Volume for 3-Month Treasury Bill, Certificate of Deposit, and Eurodollar Futures (1976 through 2001)

Exhibit 1.7 Global Interest Rate Swaps Outstanding (Converted to U.S. Dollars)

Exhibit 1.8 Global versus U.S. Interest Rate Swaps Outstanding (Converted to U.S. Dollars)

Exhibit 1.9 Exchanges That Trade Money Market Futures

PART TWO
BUILDING BLOCKS: EURODOLLAR FUTURES

Chapter 2
The Eurodollar Time Deposit

Exhibit 2.1 Eurodollar Deposit Rates (Monday, June 17, 2002)

Chapter 3
The Eurodollar Futures Contract

Exhibit 3.1 Eurodollar Futures Contract Specifications

Exhibit 3.2 Contract Month Symbols

Exhibit 3.3 Bloomberg EDSF Function (Prices for June 17, 2002)

Exhibit 3.4 Contract Year Color Grid (As of June 12, 2002)

Exhibit 3.5 How Eurodollar Futures Work

Exhibit 3.6 Eurodollar Futures Volume and Open Interest (1982 through June 2002)

Exhibit 3.7 Bond and Eurodollar Futures Open Interest by Contract (Year-End 2001)

Exhibit 3.8 Other 3-Month Money Market Futures Contract Specifications

Chapter 4
Forward and Futures Interest Rates

Exhibit 4.1 Eurodollar Futures Prices and Rates (June 17, 2002)

Exhibit 4.2 Eurodollar Deposit Rates (Monday, June 17, 2002)

Exhibit 4.3 Key Differences between Forward and Futures Markets

Exhibit 4.4 Are Futures Rich or Cheap? (June 17, 2002)

Exhibit 4.5 Is Term LIBOR Rich or Cheap? (June 17, 2002)

Exhibit 4.6 Return by Contract for Simple Buy and Hold Strategies (Mean of Return, Standard Deviation of Return, Sharpe Ratio)

Exhibit 4.7 Eurodollar Futures Prices and Rates (Monday, June 17, 2002)

Exhibit 4.8 Spot and Forward-Starting Term Rates (June 17, 2002)

Chapter 5
Hedging with Eurodollar Futures

Exhibit 5.1 Terminal Wealths and Zero-Coupon Bond Prices (June 17, 2002)

Exhibit 5.2 Effect of Rate Changes on the Value of the $100 Million 1-Year Zero

Exhibit 5.3 Pricing a 2-Year, 5% Coupon Bond (June 17, 2002)

Exhibit 5.4 Number of Eurodollar Futures Needed to Hedge $1 Million Par Amount Zero (June 17, 2002)

Number of Eurodollar Futures Needed to Hedge $100 Million Par Amount 5% Semiannual Coupon Bond (June 17, 2002)

Exhibit 5.5 Number of Eurodollar Futures Needed to Hedge the Cost of Borrowing $100 Million for 91 Days (June 17, 2002)

Exhibit 5.6 Constructing Terminal Wealths and Zero Prices Using a Stub Rate
(Trade Date = Thursday, July 18, 2002)
(Value Date for Stub Rate = Monday, July 22, 2002)

Exhibit 5.7 Correlation between Weekly Changes in Lead Eurodollar Futures Rates and Spot LIBOR (January 1997 through July 2002)

Exhibit 5.8 Interpolating Terminal Wealths (July 18, 2002)

Chapter 6
Pricing and Hedging a Swap with Eurodollar Futures

Exhibit 6.1 1-Year Fixed/Floating Interest Rate Swap with Quarterly Payments

Exhibit 6.2 Eurodollar Futures Prices, Terminal Wealths, and Zero-Coupon Bond Prices (June 17, 2002)

Exhibit 6.3 Eurodollar Futures Rates vs. Swap Fixed Rate (June 17, 2002)

Exhibit 6.4 Net Cash Flows and Present Values for a 1-Year Receive Fixed/Pay Floating Interest Rate Swap (Fixed Rate = 2.40670876%)

Exhibit 6.5 Hedging the Swap’s Cash Flows (June 17, 2002)

Exhibit 6.6 Swap Hedge Based on the Cash Flow Method Effect of a 1-Basis-Point Increase in Each Futures Rate (June 17, 2002)

Exhibit 6.7 Swap Hedge Based on the Hypothetical Securities Method Effect of a 1-Basis-Point Increase in Each Futures Rate (June 17, 2002)

Exhibit 6.8 Hedge for Below-the-Market Swap (0.4067%) Effect of a 1-Basis-Point Increase in Each Futures Rate (June 17, 2002)

Hedge for Above-the-Market Swap (4.4067%)
Effect of a 1-Basis-Point Increase in Each Futures Rate (June 17, 2002)

Exhibit 6.9 Convexity Characteristics of a Non-Callable Bond

Exhibit 6.10 Estimating the Convexity Bias between Futures and Forward Rates (June 17, 2002)

Exhibit 6.11 Eurodollar Futures and Swap Convexity Bias (June 17, 2002)

Exhibit 6.12 Convexity Bias by Futures Contract and Swap Maturity (June 17, 2002)

Exhibit 6.13 Three Yield Curves: Futures, Zero Coupon, and Par Coupon (June 17, 2002)

Exhibit 6.14 Three Yield Curves: Futures, Zero Coupon, and Par Coupon (June 17, 2002)

PART THREE
EURODOLLAR FUTURES APPLICATIONS

Chapter 7
The Convexity Bias in Eurodollar Futures

Exhibit 7.1 Convexity Bias (June 13, 1994)

Exhibit 7.2 Structure of Eurodollar Futures Rates (June 13, 1994)

Exhibit 7.3 Cash Consequences of a Change in a Forward Rate

Exhibit 7.4 Swap and Eurodollar Futures P/Ls

Exhibit 7.5 The Convexity Difference between Swaps and Eurodollar Futures

Exhibit 7.6 Net P/Ls for a Receive Fixed/Pay Floating Swap Hedged with Short Eurodollar Futures

Exhibit 7.7 Changes in 5-Year Term Rates versus Changes in the 4-3/4 Year Futures Rate
In Basis Points (Weekly Interval, 7/10/92 through 7/1/94)

Exhibit 7.8 Hedge P/L for a 3-Month Swap 1-3/4 Years Forward (Weekly Gains per Futures Contract, 1/5/90 through 7/1/94)

Exhibit 7.9 Hedge P/L for a 3-Month Swap 4-3/4 Years Forward (Weekly Gains per Futures Contract, 7/10/92 through 7/1/94)

Exhibit 7.10 Calculating the Value of the Convexity Bias

Exhibit 7.11 Standard Deviation of Eurodollar Futures Rate Changes (Annualized)

Exhibit 7.12 Standard Deviation of Term Yield Changes

Exhibit 7.13 Correlation of Eurodollar Rates and Term Rates

Exhibit 7.14 Eurodollar and Swap Convexity Bias (June 13, 1994)

Convexity Adjusted Swap Yields

Exhibit 7.15 Convexity Bias in Forward Swaps (bp)

Exhibit 7.16 Spreads between Market and Implied Swap Yields

Chapter 8
Convexity Bias Report Card

Exhibit 8.1 Eurodollar/Swap Convexity Adjustments (Theoretical vs. Market)

Exhibit 8.2 Eurodollar Convexity Bias Greeks (April 14, 1997)

Exhibit 8.3 Convexity Bias Greeks for Swaps (April 14, 1997)

Chapter 9
New Convexity Bias Series

Exhibit 9.1 Eurodollar Futures Rates (January 4, 2001, and January 4, 2002)

Eurodollar Futures Implied Volatilities (January 4, 2001, and January 4, 2002)

Exhibit 9.2 Convexity Bias Values for 5-Year Swaps (January 26, 1996, through December 31, 2001)

Convexity Bias Values for 10-Year Swaps (January 26, 1996, through December 31, 2001)

Chapter 10
Convexity Bias: An Update

Exhibit 10.1 Daily Zero to Ten

Chapter 11
Measuring and Trading Term TED Spreads

Exhibit 11.1 History of the TED Spread, 1970–1995 (3-Month LIBOR Less 3-Month Treasury Bill Rate)

Exhibit 11.2 2-Year Term TED

Exhibit 11.3 Term TED Spreads (June 5, 1995)

Exhibit 11.4 5-Year Term TED Spreads (September 1993 through May 1995)

Exhibit 11.5 Effect of Yield Curve Slope on the Difference between Unweighted and Weighted TED Spreads (5-Year)

Exhibit 11.6 2-Year TED Spread versus 2-Year Note Yield (1989 through 1995)

Exhibit 11.7 Change in 2-Year Term TED Spread versus Change in 2-Year Treasury Yield (Monthly Intervals, May 1989 through May 1995)

Exhibit 11.8 Eurodollar Futures Hedge Ratios for a 2-Year Term TED($100 Million of the 6-1/8s of 5/31/97)

Exhibit 11.9 Forward Term TED Spreads (Implied Eurodollar/Treasury Spreads for June 5, 1995)

Exhibit 11.10 2-Year versus 5-Year Term TED Spreads

2×5 Forward Term TED

Exhibit 11.11 Eurodollar Hedge for a 2×5 Term TED Spread (June 5, 1995)

Exhibit 11.12 Components of the Term TED Spread (June 5, 1995)

Exhibit 11.13 Parsing the 5-Year Term TED Spread (Basis Points)

Exhibit 11.A1 Terminal Wealths and Discount Factors (June 5, 1995)

Exhibit 11.A2 Time Line 1: Calculating a Spot Stub Rate

Exhibit 11.A3 Time Line 2: Calculating a Discount Factor for a Particular Cash Flow

Exhibit 11.A4 Interpolating Terminal Wealths

Exhibit 11.A5 Time Line 3: Tracking the Cash Flows on a Treasury Note

Exhibit 11.A6 TED Spread: Eurodollar Strip Rate versus Treasury Yield

Exhibit 11.A7 TED Spread: Implied Eurodollar Yield versus Treasury Yield

Exhibit 11.A8 TED Spread: Fixed Spread to Eurodollar Rates

Exhibit 11.A9 Forward Term TED Spread

Exhibit 11.A10 Hedge Ratios for TED Spread Trades ($100 Million of the 6-1/8s of 5/31/97) (Trade June 5, 1995, Settle June 6, 1995)

Exhibit 11.A11 Hedge Ratios: Fixed Spread against Eurodollar Rates

Chapter 12
TED Spreads: An Update

Exhibit 12.1 2-Year Note TED Spreads (Plus Forward TEDs to September 18, 2002) (September 10, 2002)

Exhibit 12.2 TED Spreads (Plus Forward TEDs to December 18, 2002) (September 10, 2002)

Chapter 13
Hedging and Trading with Eurodollar Stacks, Packs, and Bundles

Exhibit 13.1 Treasury Note Correlations with ED Packs (June 1994 to June 1999)

Exhibit 13.2 Eurodollar Hedges for a 2-Year Note (5-1/2s of 7/31/01 as of August 4, 1999)

Exhibit 13.3 Eurodollar Futures Contract Rates (Closing Levels, August 4, 1999)

Exhibit 13.4 Contracts by Color (August 4, 1999)

Exhibit 13.5 The Menu of Eurodollar Bundles

Exhibit 13.6 Best Pack and Bundle Hedges (2-Year Note, 5-Year Note, and 10-Year Note)

Exhibit 13.7 Best Single Contract, Pack, and Bundle Hedges

Exhibit 13.8 Treasury Note Correlations with Eurodollar Packs (Daily Price Changes, June 1994 to June 1999)

Exhibit 13.9 Hedge Horizon and Best Hedges

Exhibit 13.10 Short-Term versus Long-Term Correlation between Price Changes in 5-Year Treasurys and First White 5-Year Bundle (Daily, June 14, 1994 to June 14, 1999)

Exhibit 13.11 The Consequences of Decorrelation: Errors from DV01-Hedging OTR 5-Year Treasury Note with First White 5-Year Bundle (Daily, June 14, 1994 to June 14, 1999)

Exhibit 13.12 Volatility of Daily Changes in ED Contract Rates and Term TED Yields (Standard Deviations, Mid-1994 to Mid-1999)

Exhibit 13.13 Scaled Hedges for a 2-Year Treasury Note (5-5/8s of 9/30/01 as of October 27, 1999, Daily Standard Deviation = $227,618)

Exhibit 13.14 Deconstructing a Curve TED Spread

Exhibit 13.15 The Curve Trade Implied by a Red Pack Hedge for a 2-Year Treasury Note

Exhibit 13.16 Calculating the Curve Spread

Exhibit 13.17 Curve Exposure

Exhibit 13.18 Generic Eurodollar Curve Spreads

Exhibit 13.19 Augmenting a 2-Year TED Spread

Chapter 14
Hedging Extension and Compression Risk in Callable Agency Notes

Exhibit 14.1 Callable Agency Yield Spread over 10-Year Treasury (Yield Spread in Basis Points)

Exhibit 14.2 Structure of a Callable Agency Security (10-Year Note That Cannot Be Called During the First 5 Years of Its Life)

Exhibit 14.3 Standard Maturities and Call Features

Exhibit 14.4 Components of Risk in a Callable Note (10-Year Note, Callable in 5 Years)

Exhibit 14.5 Constructing a Synthetic Forward Note

Exhibit 14.6 Alternative Hedges for a 10-Year Note Callable in 5 Years (Call Option’s Delta = 0.5)

Exhibit 14.7 Delta Hedges for $10 Million of a Callable Agency Note (10-Year Maturity, Callable in 5 Years)

Exhibit 14.8 How to Price a Forward Note

Exhibit 14.9 Callable Agency Hedge: 10-Year Callable in 5 (Trade January 20, 1995, Settlement January 30, 1995)

Exhibit 14.10 Callable Agency Yield Spread over 10-Year Treasury (8.5 Percent Coupon, 10-Year Callable in 5) (Yield Spread in Basis Points)

Exhibit 14.11 Value of American Option versus European Options

Exhibit 14.12 European Call Option Values (No Call Protection)

Exhibit 14.13 European Call Option Values (5 Years of Call Protection)

Exhibit 14.14 Hedging with Eurodollar Futures (3-Year Callable Note with 2 Years of Call Protection)

Exhibit 14.15 Hedging with Eurodollar Futures (3-Year Callable Note with No Call Protection)

Chapter 15
Opportunities in the S&P 500 Calendar Roll

Exhibit 15.1 Average S&P 500 Futures Calendar Spreads (First Deferred — Lead) versus Business Days to Lead Contract Expiry (1Q 1996 through 4Q 1998) Actual Calendar Spread (Index Points) Actual Less Theoretical Spread (Index Points) Implied Financing Rate Less Lead ED Rate (bps)

Exhibit 15.2 Implied Financing Rate Less Lead ED Rate (1988–1998)

Exhibit 15.3 Daily Changes in the Lead ED Futures Rate

Exhibit 15.4 Target Fed Funds Rate

Exhibit 15.5 Lead ED Futures Rate Less Target Fed Funds Rate (bps)

Chapter 16
Trading the Turn: 1993

Exhibit 16.1 LIBOR Futures Calendar Spread (December 1992/January 1993)

Exhibit 16.2 Time Line for the 1993 Turn

Exhibit 16.3 Fed Funds Behavior around Year-End

Exhibit 16.4 How the Turn Fits In

Exhibit 16.5 Effect of Turn Rate on the Fair Values of Dec ′93 LIBOR and Eurodollar Futures Prices (3-Day Turn)

Exhibit 16.6 Implied 1-Month Forward Deposit Rates (September 13, 1993)

Exhibit 16.7 LIBOR Futures Calendar Spread (December 1992/January 1993)

Exhibit 16.8 LIBOR Futures Calendar Spread (December 1993/January 1994)

Exhibit 16.9 Add-on Turn Volatility Premium (3 percent Forward Rate)

Exhibit 16.10 Add-on Turn Volatility Premium (6 percent Forward Rate)

Exhibit 16.11 LED Volatility Spreads (December 1991 Contracts)

Exhibit 16.12 LED Volatility Spreads (December 1992 Contracts)

Exhibit 16.13 LED Volatility Spreads (December 1993 Contracts)

Chapter 17
The Turn: An Update

Exhibit 17.1 Eurodollar and LIBOR Turn Report

Exhibit 17.2 Stub Hedges (Using CBOT Fed Funds Futures)

PART FOUR
BUILDING BLOCKS: EURODOLLAR OPTIONS

Chapter 18
The Eurodollar Option Contract

Exhibit 18.1 Grid of Available Options (June 17, 2002, Close of Trading)

Exhibit 18.2 Eurodollar Option Contract Specifications

Exhibit 18.3 Number of Standard, Serial, Mid-curve, and Bundle Option Contracts

Exhibit 18.4 Option Type Symbols

Exhibit 18.5 Contract Month Symbols

Exhibit 18.6 October ′02 1-Year Mid-curve Option Prices

Chapter 19
Price, Volatility, and Risk Parameter Conventions

Exhibit 19.1 Pricing Sep ′02 Eurodollar Options (Closing Values, June 17, 2002) (Futures = 97.895; Discounting Interest Rate = 1.879%)

Exhibit 19.2 Option Pricing Model (Assumed Volatility → Theoretical Price)

Exhibit 19.3 Distribution of Rate Changes

Exhibit 19.4 Option Pricing Model (Market Price → Implied Volatility)

Exhibit 19.5 Summary of Risk Parameters

Application of Risk Parameters (For Small Changes in Market Conditions)

Chapter 20
Caps, Floors, and Eurodollar Options

Exhibit 20.1 Cap and Eurodollar Put; Floor and Eurodollar Call

Exhibit 20.2 Rate Setting on a 2-Year Cap

Exhibit 20.3 An Interest Rate Cap Is Like a Eurodollar Put (Put Strike Price = 100 — Cap Rate)

Exhibit 20.4 Comparing Eurodollar Puts to an Interest Rate Cap (June 17, 2002)

Chapter 21
Structure and Patterns of Eurodollar Rate Volatility

Exhibit 21.1 Summary: Historical, Implied, Realized, and Break-Even Volatilities

Exhibit 21.2 Implied versus Historical Eurodollar Volatility (Lead Contract, 1984 through 2002)

Exhibit 21.3 Break-Even Volatility

Exhibit 21.4 Normalized Historical Eurodollar Basis Point Volatility (1994 through 2002)

Normalized Historical Eurodollar Relative Rate Volatility (1994 through 2002)

Exhibit 21.5 Basis Point Implied Volatilities for At-the-Money Call Options (June 17, 2002)

Exhibit 21.6 Volatility Cones and Histograms (Sep ′02 and Dec ′02 Quarterly Eurodollar Options) (June 17, 2002)

Exhibit 21.7 Volatility Cones and Histograms (Sep ′02 and Dec ′02 1-Year Mid-curve Eurodollar Options) (June 17, 2002)

Exhibit 21.8 Implied Volatilities—Sep ′02 Quarterly Eurodollar Options (June 17, 2002) (Sep ′02 Futures = 97.895)

Exhibit 21.9 Implied Volatility Skew—Sep ′02 Quarterly Eurodollar Options (June 17, 2002) (Sep ′02 Futures = 97.895)

Exhibit 21.10 Implied Distribution of Futures Rates from Market Option Prices (Sep ′02 Futures = 97.895) (June 17, 2002)

PART FIVE
EURODOLLAR OPTION APPLICATIONS

Chapter 23
Trading with Serial and Mid-curve Eurodollar Options

Exhibit 23.1 Quarterly, Serial, and Mid-curve Eurodollar Options

Exhibit 23.2 Vega, Gamma, and Theta (At-the-Money Call)

Exhibit 23.3 Risk Parameters of a Curve Steepener (Long 94.375 June ′98 Call, Short 94.25 “Short June” ′98 Call)

Exhibit 23.4 A Curve-Steepening Trade with Eurodollar Options (Long 94.375 June ′98 Call, Short 94.25 “Short June” ′98 Call)

Exhibit 23.5 P/L of a Curve-Steepening Trade at Expiration (Long 94.375 June ′98 Call, Short 94.25 “Short June” ′98 Call)

Exhibit 23.6 P/L for a Delta-Neutral Time Decay Spread

Exhibit 23.7 90-Day Historical Eurodollar Volatility (A Cross-sectional View)

Exhibit 23.8 Term Structure of Implied Eurodollar Volatility

Exhibit 23.9 Timeline of FOMC Meetings

Exhibit 23.10 First Eurodollar Rate (Dependent) against OTR 2-Year Treasury Yield (Independent) (April 26, 1996-March 25, 1998; R² = 0.52)

Exhibit 23.11 Fifth Eurodollar Rate (Dependent) against OTR 2-Year Treasury Yield (Independent) (April 26, 1996-March 25, 1998; R² = 0.94)

Exhibit 23.12 TED Spread

Exhibit 23.13 Yields of U.S. 5-Year Notes and 5th Eurodollar since June ′94

Exhibit 23.14 Yield Spread between 5-Year Notes and 5th Eurodollar since June ′94 (In Basis Points)

Chapter 25
What Happens to Eurodollar Volatility when Rates Fall?

Exhibit 25.1 Key Rate Levels versus Dec ′01 Implied Rate Volatility (September 10, 2001, to October 4, 2001)

Exhibit 25.2 Eurodollar Volatility Cones (2-Year History as of Close of Business October 4, 2001)

Exhibit 25.3 Eurodollar Rate Levels and Basis Point Volatilities (1983 to October 4, 2001)

Exhibit 25.4 Eurodollar Rate Levels and Basis Point Volatilities (December 6, 1990, to October 4, 2001)

Exhibit 25.5 Relative and Basis Point Rate Volatilities (January through October 2001)

Chapter 26
Eurodollar Volatility: An Update

Exhibit 26.1 Volatility Cones and Return Distributions (2-Year History as of September 10, 2002)

Chapter 27
Hedging Convexity Bias

Exhibit 27.1 Net Swap/Eurodollar P/L
($100MM 4-Year Receive Fixed Swap/Short Eurodollar Futures Strip)

Change in Net DV01 (With Respect to Changes in Eurodollar Futures Rates)

Exhibit 27.2 Convexity Bias Value and Vega

Exhibit 27.3 Options on Eurodollar Futures (August 1, 2001)

Exhibit 27.4 Option and Swap Characteristics (August 1, 2001)

Exhibit 27.5 Second Red, Fourth Short, and Second Green Eurodollar Rates As Proxies for a 4-Year Term Rate (Weekly Changes, 1/24/97–6/30/01)

Exhibit 27.6 Second Red Eurodollar Implied Volatility As Proxy for Term Swaption Implied Volatility

Exhibit 27.7 Second Red, Fourth Short, and Second Green Eurodollar Implied Volatilities As Proxies for Term Swaption Implied Volatility (Weekly Changes, 9/25/98-7/13/01)