An Integrated Approach to Hedging and Pricing Eurodollar Derivatives

Taking the term structure of Treasury securities and Eurodollar rates as exogenous, this paper provides an integrated approach to the pricing and hedging of LIBOR derivatives. Our approach allows the spread between Eurodollar and Treasury rates to reflect both the credit risk in holding Eurodollar deposits and a convenience yield from holding Treasury securities. This integrated approach includes the models of Babbs [1991], Grinblatt [1994], and Jarrow and Turnbull [1995] as special cases.<p> <p>This paper was presented at the Financial Institutions Center's May 1996 conference on "