Eurodollar — a different kind of futures market
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Why do you recommend this news source? Eurodollar futures are a way for companies and banks to lock in an interest rate today, for money it intends to borrow or lend in the future.
They are traded on the Chicago Mercantile Exchange CMEand are the most widely traded futures in the world, with open interest number of contracts outstanding typically in the 7 to 9 million range for the shortest maturity futures.
They are essentially the futures equivalent of forward rate agreements FRAs. However, because Eurodollar futures are exchange eurodollar futures trading, they offer greater liquidity and lower transaction costs, but can not be customized like over the counter OTC FRAs. Since Eurodollar futures are marginedthere is virtually no credit risk because any gains or losses eurodollar futures trading marked to marketor in other words they are paid daily.
As such, if interest rates move in your favor, you receive cash compensation that day rather than waiting until expiry; eurodollar futures trading settlements are done eurodollar futures trading day. Since the contract is cash settled, no loan is actually extended even though the contract mentions a notional principal amount.
Many banks and large corporations will use Eurodollar futures to hedge future interest rate exposure. Sellers hedge against the risk of rising interest rates, while buyers hedge against the risk of falling interest rates. Other parties that use Eurodollar futures are speculators purely looking to make bets on future directional changes in interest rates.
Pricing of Eurodollar futures is unique in the sense that it is quoted as numerical price, despite the fact that it is an interest rate. The price quoted is simply minus the implied interest rate. For instance, a price of Company Z expects to generate revenue over time, and the company expects to be able to repay this amount on September 1, Company Z has a number of ways to meet this expenditure; in this example we only compare a traditional loan to Eurodollar futures. Let's assume Company Z can normally borrow funds for 3 months from its local bank at a rate of 3 month Libor plus basis points bps.
Note that this represents a variable interest rate, as the interest rate in 3 months eurodollar futures trading unknown until the actual day arrives. What if the company wishes to know on March 1, the interest they must pay on the loan, which will not occur for another 3 months? Let's assume that on March 1, the price of Eurodollar futures is exactly At expiry, all accounts are margined to the final closing price and closed; there is no more activity related to this specific Eurodollar futures contract.
Eurodollar futures trading now goes to eurodollar futures trading local bank from earlier in the example and borrows this amount at its established rate of basis points above the 3 month Libor. The 3 month Libor is now observable as 7. From the makers of. Day 52 Wk Vol Avg Vol. Unable to complete your request.
Please refresh your browser. See more recent news. CME Group, the world's leading and most diverse derivatives marketplace, today announced it reached an all-time daily open interest record for Eurodollar futures of The previous single-day open interest A Fix For Eurodollar Futures.
BTMU for engaging in multiple acts of spoofing in a variety of futures contracts on the CME Group sees record volume day in Eurodollar futures trading futures. Eurodollar futures and options combined reached 8, contracts, its third highest day overall. CME Group, the world's leading and most diverse derivatives marketplace, announced a Eurodollar futures trading futures record volume day with 6, contracts traded on Sept.
Sterling And Short Sterling. This Great Graphic, created on Bloomberg, depicts the dollar against sterling, rather than sterling against the dollar, as normally quoted yellow line and the March 15 short-sterling futures contract white line Suggest other news sources for this topic. Retrieved from " http: Track your investments automatically. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants eurodollar futures trading to its accuracy.
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View articles referencing this futures contract. Contents 1 Eurodollar futures terminology 2 Mechanics of Eurodollar Futures 3 How do Eurodollar futures lock in interest rates?