Abstract
We examine the markets for one-month LIBOR futures contracts and options on those futures for a year-end price effect consistent with the previously identified year-end rate increase in one-month LIBOR. The cash market rate increase passes through to derivative prices, which allows the derivatives to properly hedge year-end interest rate risk. However, while the year-end effect appears in the derivative contract, these derivative contracts provide biased forecasts of both future interest rates and their volatility. The turn-of-the-year effect appears to contribute to the bias in the futures contract but not in the options contract. The information in the derivatives almost always subsumes simple benchmark forecasts.
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