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The Learn About Futures Insider: Eurodollar

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The Learn About Futures Insider: Eurodollar

Post by metalsguru on Fri Apr 29, 2011 7:29 am

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

[You must be registered and logged in to see this image.]
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:
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The tick size calculation for the contract comes from this equation:

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Key terms for the eurodollar market include:


London Interbank Offered Rate (LIBOR) - the interest rate at which banks are offering to lend money to each other on the London interbank market . This rate is one of the most widely used for short-term interest rates.

IMM - the International Monetary Market, a division of the Chicago Mercantile Exchange which is now part of the CME Group.
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


_______________________________________________________________________________________
Disclaimer: There is a substantial risk of loss in futures trading and it is not suitable for all investors. Losses can exceed your account size and/or margin requirements. Commodities trading can be extremely risky and is not for everyone. Some trading strategies have unlimited risk. Educate yourself on the risks and rewards of such investing prior to trading. Futures Press, the publisher, and/or its affiliates, staff or anyone associated with Futures Press, Inc. or Learn About Futures, do not guarantee profits or pre-determined loss points, and are not held monetarily responsible for the trading losses of others (subscribers or otherwise). Past results are by no means indicative of potential future returns. Fundamental factors, seasonal and weather trends, and current events may have already been factored into the markets. Options DO NOT necessarily move lock step with the underlying futures contract. Information provided is compiled by sources believed to be reliable. Futures Press, Inc., and/or its principals, assume no responsibility for any errors or omissions as the information may not be complete or events may have been cancelled or rescheduled. Any copy, reprint, broadcast or distribution of this report of any kind is prohibited without the expressed written consent of Futures Press, Inc.[You must be registered and logged in to see this link.][You must be registered and logged in to see this link.]

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