A question regarding eurodollar futures rate I am reading a paper, and cannot understand this part. In the second line, it is said that
the pay off on this futures contract equals one minus the current annualized 3 month LIBOR rate in the contract expiration month.
Right after the sentence, however, the equation is using a policy rate of the central bank. Shouldn't r_t+n be a LIBOR rate instead of policy rate?
Please explain why if anybody knows about this.
In theoretical literature LIBOR rate and central bank's rate (for example Fed's fund rate) are often used interchangeably (see many examples in    Freixas and  Rochet: Microeconomics of Banking).
The reason why they are used interchangeably is that there is quite a strong proportional relationship between them and LIBOR rate depends on the Fed's fund rate. Hence:
$$r_{\text{LIBOR}} = f(r_{\text{Fed}})$$
In fact they are approximately equal so that:
$$r_{\text{LIBOR}} \approx r_{\text{Fed}}$$.
You can see that this holds in real life pretty well from the graph below based on Fred data. Also as explained here the correlation between them is almost 1. Hence, for purposes of theoretical modeling we will often just simplify and say that $r_{\text{LIBOR}} = r_{\text{Fed}}$ even though in reality this holds only approximately (there is really no point in explicitly modeling $r_{\text{LIBOR}} = f(r_{\text{Fed}})$ - models are meant to be simplified version of reality).