The implied 3-month U.S. dollar LIBOR interest rate is subtracted from the price of Eurodollar futures. In this case, a $96.00 eurodollar futures price implies a 4 percent implied settlement interest rate, or 100 minus 96. The price moves in the opposite direction of the yield.
What exactly is a Eurodollar future?
The Eurodollar futures contract, which is traded on the Chicago Mercantile Exchange, is a financial futures contract based on these deposits (CME). EuroDollar futures contracts, in particular, are derivatives on the interest rate paid on those deposits. A Eurodollar futures contract is a cash-settled futures product whose price swings in tandem with the LIBOR interest rate. Eurodollar futures allow businesses and banks to lock in an interest rate on money they want to borrow or lend in the future. The notional or “face value” of each CME Eurodollar futures contract is $1,000,000, while futures leverage allows one contract to be traded with a margin of around $1,000.
The market’s prediction of the 3-month USD LIBOR interest rate expected to prevail on the settlement date determines the price of CME Eurodollar futures. An interest rate of 100.00 – 95.00, or 5%, is implied by a price of 95.00. A contract’s settlement price is defined as 100.00 less the official British Bankers’ Association 3-month LIBOR fixing on the day the contract is settled.
How long will Eurodollar futures last?
Eurodollar futures were the first futures contract to be settled in cash rather than delivered physically. At any given time, there are 40 quarterly futures contracts offered, spanning ten years, plus the four nearest serial (non-quarterly) months.
What is the purpose of Eurodollars?
U.S. dollars deposited in foreign banks are referred to as Eurodollars. Assume that someone deposits $5,000 in a Brazilian bank account. Eurodollars are the currency in question. It’s also known as eurocurrency because it’s money issued by one government and deposited in a separate country’s account. If someone deposited 5,000 Mexican pesos at the same Brazilian bank, the money would be treated as eurocurrency, but not as eurodollars. As “dollar” is the nickname for US cash, eurodollars only refer to US dollars that have been deposited in another country.
What is CME Eurodollar?
Specs. Eurodollar futures and options are the favored tool of traders to communicate their views on future interest rate movements because they represent a key building component of the financial system. You can efficiently target interest rate risks that matter to you with unequaled book depth and deep liquidity out more than five years.
What does a Eurodollar deposit entail?
A eurodollar is a US dollar that has been placed outside of the US, particularly in Europe. When Eurodollar deposits are removed, foreign banks are required to pay in US dollars.
Is the Eurodollar LIBOR equivalent?
The interest rate offered on U.S. dollar-denominated deposits held in banks outside the United States is reflected in the price of eurodollar futures. The price represents the market estimate of the 3-month US dollar LIBOR (London Interbank Offered Rate) interest rate expected on the contract’s settlement date. LIBOR stands for London Interbank Offered Rate, which is a benchmark for short-term interest rates at which banks can borrow funds. Eurodollar futures are a LIBOR-based derivative that represent the London Interbank Offered Rate (LIBOR) for a three-month $1 million offshore deposit.
What is the meaning of Eurodollar?
The phrase eurodollar refers to deposits in US dollars held by foreign banks or American bank branches abroad. Eurodollars are not subject to Federal Reserve Board regulation, including reserve requirements, because they are stored outside the United States. Dollar-denominated deposits that were not subject to US banking laws were virtually exclusively held in Europe at first (hence, the name eurodollar). They’re now extensively held in branches in the Bahamas and the Cayman Islands, as well.
What is the most cost-effective way to distribute a bond?
The phrase “cheapest to deliver” (CTD) refers to the cheapest security delivered to a long position in a futures contract to meet the contract’s requirements. It only applies to contracts that allow for the delivery of a variety of somewhat different securities. This is prevalent in Treasury bond futures contracts, which normally state that any Treasury bond can be delivered as long as it is within a specified maturity range and has a specified coupon rate. The coupon rate is the interest rate that a bond issuer pays over the life of the bond.
What is the fundamental rationale for the Eurodollar market’s existence?
One of the reasons for the expansion in the international short-term capital market is the Eurodollar. It’s also important for funding international trade because it allows traders to import and export using less expensive means.
Who are the Eurodollar market’s participants?
Large corporations, particularly international firms, commercial banks, and central banks are the primary lenders in the Euro-dollar market. Commercial banks are the most common intermediaries, whereas end borrowers of all economic and institutional stripes borrow in the market.