Trade Eurodollar futures

It is easy to confuse the Euro/U.S. dollar currency pair or Euro foreign exchange futures with the Euro/U.S. dollar currency pair or Euro foreign exchange futures. The Euro dollar has nothing to do with the European single currency launched in 1999. On the contrary, Eurodollars are fixed deposits denominated in U.S. dollars, deposited in banks outside the United States. A time deposit is just a bank deposit with interest on a specific maturity date.

Since time deposits are not in the United States, Eurodollars are not within the jurisdiction of the Federal Reserve and are subject to relatively low levels of supervision. In addition, because Eurodollars are not subject to U.S. banking regulations, investors face higher levels of risk and higher interest rates.

Key points

  • Not to be confused with the Euro/U.S. dollar (EUR/USD) currency pair or the Euro currency, the Eurodollar is a U.S. dollar deposit held in a bank outside the United States.
  • The name Eurodollar is derived from the fact that the term originally referred to US dollar-denominated deposits mainly deposited in European banks, but now US dollar deposits are deposited in banks around the world.
  • Eurodollars generally provide higher yields because they are not subject to U.S. banking supervision and therefore are more risky.
  • Eurodollar futures are traded electronically on the trading floor and the Chicago Mercantile Exchange.

The name Eurodollar comes from the fact that deposits originally denominated in US dollars are mainly deposited in European banks. At first, these deposits were called European bank dollars. However, deposits denominated in U.S. dollars are now stored in global financial centers and are still called Eurodollars.

Similarly (and confusingly), the term euro currency is used to describe the currency of the country where the currency is issued outside the bank. For example, the Japanese yen deposited in a Brazilian bank will be defined as the Euro currency.

The history of the Eurodollar

After the end of World War II, the number of dollar deposits outside the United States increased significantly. Contributing factors include the increase in imports of the Marshall Plan to the United States and economic assistance to Europe.

The origin of the Eurodollar market can be traced back to the Cold War in the 1950s, when the Soviet Union began to transfer its dollar-denominated revenue (from the sale of commodities such as crude oil) from American banks. This is to prevent the United States from being able to freeze its assets. Since then, the Eurodollar has become one of the largest short-term currency markets in the world, and its interest rates have become the benchmark for corporate financing.

Eurodollars are also used for TED spreads as an indicator of credit risk. The TED spread is the difference between the interest rate of the three-month US Treasury futures contract and the interest rate of the three-month European dollar contract with the same expiration month. TED is an acronym that uses T-Bill and ED (symbol for Eurodollar futures contracts). The increase or decrease in the TED spread reflects the perception of the level of default risk of interbank lending.

Eurodollar Futures

The Chicago Mercantile Exchange (CME) launched the Eurodollar futures contract in 1981, marking the first cash-settled futures contract. The basic instrument of Eurodollar futures is Eurodollar time deposits with a principal of 1 million U.S. dollars and a maturity of three months. At maturity, the seller of a cash-settled futures contract can transfer the relevant cash position instead of delivering the underlying asset. (However, most traders close futures contracts by offsetting transactions before expiry to avoid delivery.)

Eurodollar futures were initially traded on the largest trading floor above the Chicago Mercantile Exchange, which can accommodate up to 1,500 traders and clerks. Most Eurodollar futures trading is now conducted electronically.

Trading Eurodollar futures contracts requires opening an account with a brokerage company, which provides futures trading and initial deposits, called margin.

The public outcry Eurodollar contract code (that is, used on the trading floor to communicate orders through shouts and gestures) is ED, and the electronic contract code is GE. Electronic trading of Eurodollar futures is conducted on the CME Globex electronic trading platform from 6 pm to 5 pm Eastern time, Sunday to Friday. Like other financial futures contracts, the expiry months are March, June, September, and December. In the most recent expiring contract month, the quotation size (minimum fluctuation) is a quarter of a basis point (0.0025 = US$6.25 per contract), and in all other contract months it is one-half of a basis point (0.005 = per share The contract is $12.50).

In terms of average daily trading volume and open positions (total number of open positions), Eurodollar has developed into one of the main contracts offered by CME Group. Futures tend to exceed E-Mini S&P 500 futures (an electronically traded futures contract that is one-fifth the size of standard S&P 500 futures contracts), crude oil futures, and 10-year U.S. Treasuries in terms of average daily trading volume and average daily trading volume. futures. Open positions.

LIBOR and Eurodollar

The price of Eurodollar futures reflects the interest rate on U.S. bank deposits denominated in U.S. dollars. More specifically, the price reflects the market indicator of the expected 3-month USD LIBOR (London Interbank Offered Rate) interest rate on the contract settlement date. LIBOR is a short-term interest rate benchmark on which banks can borrow funds in the London Interbank Offered Market. Eurodollar futures are a LIBOR-based derivative that reflects the London Interbank Offered Rate for 3 months of offshore deposits of US$1 million.

Eurodollar futures prices are expressed in numbers using 100 minus the implied 3-month USD LIBOR interest rate. Thus, the Eurodollar futures price of $96.00 reflects an implicit settlement rate of 4%, which is 100 minus 96. The price is inversely proportional to the rate of return.

For example, if an investor buys a Eurodollar futures contract at a price of US$96.00 and the price rises to US$96.02, this corresponds to the lower 3.98% of the LIBOR implied settlement rate. The buyer of the futures contract will earn $50. (1 basis point, 0.01, equals $25 per contract, and then a change of 0.02 equals a change of $50 per contract.)

The Intercontinental Exchange is the agency responsible for LIBOR and will stop issuing USD LIBOR for one week and two months after December 31, 2021. All other LIBOR will cease after June 30, 2023.

Eurodollar futures hedging

Eurodollar futures provide companies and banks with an effective means to ensure the interest rate on funds they plan to borrow or lend in the future. Eurodollar contracts are used to hedge changes in the yield curve for many years to come.

For example, suppose a company knows in September that it needs to borrow $8 million in December to make a purchase. Recall that each Eurodollar futures contract represents a fixed deposit of $1 million with a three-month maturity. The company can hedge against unfavorable changes in interest rates during the three-month period by short selling 8 December Eurodollar futures contracts (equivalent to the $8 million required to purchase).

The price of Eurodollar futures reflects the expected London Interbank Offered Rate (LIBOR) at the time of settlement, which in this case is December. By short selling the December contract, the company profited from rising interest rates, which was reflected in the corresponding drop in December Eurodollar futures prices.

Assuming that on September 1, the December Eurodollar futures contract price is exactly $96.00, which means the interest rate is 4.0%, and at the expiration in December, the final closing price is $95.00, reflecting a higher interest rate of 5.0%. If the company sold eight December Eurodollar contracts in September at a price of $96.00, it would make a profit of 100 basis points (100 x $25 = $2,500) on the eight contracts, which is equivalent to covering In the case of a short position, it is 20,000 USD (2,500 USD x 8).

In this way, the company was able to offset the impact of rising interest rates and effectively locked in the expected LIBOR in December because it was reflected in the December Eurodollar contract price when it was short-selling in September.

Speculative Eurodollar futures

As an interest rate product, the Fed’s policy decisions have a significant impact on the price of Eurodollar futures. Therefore, volatility in the Eurodollar market often occurs before and after important Federal Open Market Committee (FOMC) announcements and economic announcements that may affect the Fed’s monetary policy.

The Fed’s policy changes to lower or raise interest rates may occur within a few years, and Eurodollar futures are affected by these major trends in monetary policy.

The long-term trend characteristics of Eurodollar futures make this contract an attractive option for traders using trend-following strategies. Consider the following chart from 2000 to 2007, where the Eurodollar has shown an upward trend for 15 consecutive months, followed by a downward trend for 27 consecutive months.


The Eurodollar has historically exhibited long-term trend price changes between long-term sideways.

High liquidity and relatively low intraday volatility (that is, within a day) create opportunities for traders who use the “market making” trading style. Traders who use this non-directional strategy (neither bullish nor bearish) place orders at the same time for the bid and ask prices, trying to capture the bid-ask spread. Traders in the Eurodollar futures market also use more complex strategies, such as arbitrage and spreads against other contracts.

Bottom line

Eurodollars are often ignored by retail investors, who tend to offer more short-term volatile futures contracts, such as E-mini Standard & Poor’s or crude oil. However, the deep liquidity and long-term trend characteristics of the Eurodollar market provide interesting opportunities for small and large futures traders.

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