Three Essays on the Interest Rate Futures Differential 1. Empirical Investigation of the Size and the Nature of the Eurodollar Futures-Forward Differential 2. Decomposition of the Interest Rate Forward-Futures Price Differential 3. How Much Premium Is There for Interest Rate Futures?

This dissertation analyzes a series of issues that surround both the theoretical modeling and theempirical estimation of the forward-futures differential, commonly known as the convexityadjustment. Opposite to theoretical implication, I find that the magnitude of the forward-futuresrate differential is much smaller than what was expected, and that its sign is negative on manyoccasions. Neither asynchronicity bias, nor the unconventional feature of the Eurodollar futurespricing can explain the observed phenomena. The term structure interpolation error and the twobusiness day lag between the fixing (settlement) date and the transaction (value) date to whichthe implied forward rates and prices are applied cannot be attributed to the observed abnormalityeither. I further show that the difference between the implied forward price obtained from thespot rate term structure and the original Eurodollar futures price at any point of time before maturity is composed of two parts: the element due to marking-to-market and the element arisen from the unconventional settlement of the Eurocurrency futures. It is also demonstrated that the discrepancy between the forward price and the futures price arisen from the unconventionalsettlement of the Eurocurrency futures can be hedged using a specific basket of caplets. Thispaper also performs the analysis for the three most traded interest rate futures contracts inEurope: EURIBOR futures, short sterling futures and Euroswiss franc futures. I show that thefutures premium is barely detectible for the contracts with maturities below one year. The futures premium for maturities above twelve months varies across the models and is a subject to modelassumptions regarding the volatility input and its evolution. Finally, I show that in the presenceof the limits to arbitrage the rate on a forward rate agreement (FRA) contract and the respectiveimplied forward rate derived from the spot yield curve would differ and their difference increaseswith the maturity. This finding allows to challenge the results in recently published works that argue that the convexity adjustment is not priced in by the FRA market makers.