Which of the following indicate a long position on the TED (treasury-Eurodollar) spread?
A.
A long position in treasury bill futures and a short position in Eurodollar futures
B.
A long position in treasury bill futures and a long position in Eurodollar futures
C.
A short position in treasury bill futures and a short position in Eurodollar futures
D.
A short position in treasury bill futures and a long position in Eurodollar futures
The Answer Is:
A
This question includes an explanation.
Explanation:
The TED spread is a bet on the spread between treasury bill futures and Eurodollar futures. T-bill rates are lower than Eurodollar rates, as the former carries no risk. Eurodollars deposits, which are interbank deposits between the highest rated banks, carry very little risk as well. Therefore both these instruments generally trade at very narrow spreads. The spread widens, ie the Eurodollar rates rise in comparison to treasury bill rates when the market has credit risk fears.
A trader is said to be 'long' the spread when he benefits from the spread increasing, and 'short' the TED spread when he gains from the spread decreasing. A trader can buy the spread by being long t-bill futures and short Eurodollar futures. Similarly he can be short the spread by being short t-bill futures and long Eurodollar futures.
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