The Learn About Futures Insider for May 20th, 2010 : Eurodollar


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The Learn About Futures Insider:

Though often confused with the currency of a similar name, a Eurodollar is actually an interest rate product traded on the CME Group. This financial instrument is widely considered one of the most popular - and therefore highly liquid - financial futures markets.

Contract Size: - Eurodollar Time Deposit having a principal value of USD $1,000,000 with a three-month maturity.

Price Quote & Tick Size: Quoted in IMM Three-Month LIBOR index points or 100 minus the rate on an annual basis over a 360 day year (e.g., a rate of 2.5% shall be quoted as 97.50). 1 basis point = .01 = $25. Tick size is one-quarter of one basis point (0.0025 = $6.25 per contract) in the nearest expiring contract month; One-half of one basis point (0.005 = $12.50 per contract) in all other contract months. The "new" front-month contract begins trading in 0.0025 increments at 7:20 a.m, Central Time (CT), after the "old" expiring front-month contract ceases trading at 11:00 a.m. London time on the expiring contract month's last trading day

Contract Months: March, June, September, December

Trading Specs: Open Outcry MON-FRI: 7:20 a.m. - 2:00 p.m. CT and Globex SUN - FRI: 5:00 p.m. - 4:00 p.m. CT.

Daily Price Limit: Consult exchange.

Trading Symbols: ED; GE on Globex

Past performance is not indicative of future results.
***chart courtesy of Gecko Software

Eurodollar Facts
Eurodollars are considered U.S. dollar denominated deposits in banks not in the United States. Although the prefix "euro" is used, the contract has no relationship to European currency. Unlike some of the other interest rate products, they are not guaranteed by any government entity. These US Dollar deposits in banks held in commercial banks outside the jurisdiction of the Federal Reserve can be taken as a reflection of the London Interbank Offered Rate (LIBOR) for a three month offshore deposit.

Deposits of US dollars in foreign banks grew in the second half of the last century, owing partly to our commercial deficits.

Eurodollar futures have been traded on the CME since the end of 1981 and the price - as shown in the contract specifications - is a reflection of the forecasted interest rate at the futures contract's delivery date. For example, a forecast for a 5 percent interest rate would be reflected in a price of 95.00 for the Eurodollar.

The interest rate in question is the LIBOR, the rate at which banks borrow from one another on the London interbank market. It is calculated by Thomson Reuters and published by the British Bankers' Association every day.

In interest rate trading terms, Eurodollar contracts are short term debt instruments.

The implied forward rate calculation looks like this:

The tick size calculation for the contract comes from this equation:

Key Uses​
Eurodollar futures are often used as part of a hedging strategy for interest rate risk.

Key Concerns​
Information on the daily LIBOR may be found on the bbalibor website or through other news sources. These rates are worth noting when trading Eurodollar futures. Interest rates or the forecasted changes in interest rates can have a profound effect on the futures price. Inflation or the possibility of inflation may also influence prices. The commonly watched factors which may affect trade include economic reports or events. This may include the following:

"¢ Retail Sales
"¢ Unemployment Claims
"¢ Personal Income
"¢ PPI
"¢ CPI
"¢ New Home Sales
"¢ Bank Meetings & Member commentaries


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