标题: add-on yield and discount yield [打印本页] 作者: maratikus 时间: 2011-7-13 13:32 标题: add-on yield and discount yield
From Schweser's secret sauce:
"Eurodollar futures are priced as a discount yield, and LIBOR-based deposits are priced as an add-on yield, so deposit value is not perfectly hedged by the Eurodollar contract"
What do these two yields mean? any examples? Thanks!作者: FinancialAnaly 时间: 2011-7-13 13:32
if you think about a discount instrument it's discounted value and price converge as the instument approaches maturity. The add on yield doesn't display this characteristic comletely b/c of the different pricing convention. B/c of the inability to perfectly price a no arbitrage price like this between the two is why you have so many speculators in the euro dollar actively trading with another to earn the spread.
So if you have two seperate pricing mechanisms at work here, like what you will pay on a Libor loan and what you can lock in to lend with a euro dollar future, these two values may not totally offset. So you can earn a spread by what you value the difference. Or you can arbitrage this. Of course everyone else who favor themselves a "trader" does this two, some are really good at it and make a forturne some loose a fortune.
I'd be interested if you get any other responses to see what they have to say about the method by which these two contracts are priced though. I've noticed alot of posts on this issue as well and might not hurt to try and search some of that to see if you can dig some stuff that is helpful. You can also googel "bionic turtle" and include some of the search items words you have above. He's got a lot of videos that explain that kind of stuff in pretty granular detail.
-Best of luck to you,
