How does a Eurodollar futures contract work?
How does a Eurodollar futures contract work?
A Eurodollar future is a cash settled futures contract whose price moves in response to the LIBOR interest rate. Eurodollar futures are a way for companies and banks to lock in an interest rate today, for money they intend to borrow or lend in the future.
Is swap a futures contract?
Swap futures are futures contracts based on interest rate swaps. They are designed to give fixed-income market participants a new way to hedge spread risk, for example from mortgage-backed securities, corporate bonds and Agency debentures.
Are futures contracts sold on an exchange?
These two types of derivatives contract function in much the same way, but the main difference is that futures are exchange-traded and have standardized contract specifications. These exchanges are highly regulated and provide transparent contract and pricing data.
How do you trade Eurodollar interest rates futures?
Eurodollar futures contracts are traded through a price index. The value of the index is calculated by subtracting the interest rate of the futures contract from 100. For example, if the interest rate is set at 3%, the index price is equal to $97 (100 – 3 = 97).
Why are Eurodollars called Eurodollars?
The term eurodollar refers to U.S. dollar-denominated deposits at foreign banks or at the overseas branches of American banks. Dollar-denominated deposits not subject to U.S. banking regulations were originally held almost exclusively in Europe (hence, the name eurodollar).
What rate can the company lock in by using the eurodollar futures contract?
The December Eurodollar futures contract is quoted as 98.40 and a company plans to borrow $8 million for three months starting in December at LIBOR plus 0.5%. (a) What rate can then company lock in by using the Eurodollar futures contract?…Problem 6.10.
| Bond | Price | Conversion Factor |
|---|---|---|
| 4 | 144-02 | 1.4026 |
What are swap contracts?
A swap is a derivative contract through which two parties exchange the cash flows or liabilities from two different financial instruments. Rather, swaps are over-the-counter (OTC) contracts primarily between businesses or financial institutions that are customized to the needs of both parties.
Which of the following is a major difference between swaps and futures contracts?
Swaps are usually marked to market, whereas futures contracts are not. Swaps are derivative securities, but futures contracts are not. A futures contract involves only one future transaction, whereas a swap typically involves several future transactions.
Are futures contracts binding?
A futures contract is distinct from a forward contract in two important ways: first, a futures contract is a legally binding agreement to buy or sell a standardized asset on a specific date or during a specific month. Second, this transaction is facilitated through a futures exchange.
Can anyone trade exchange traded futures?
Futures exchanges allow people who want to trade commodities the ability to quickly find each other and safely trade. Access to the exchange is available only to member firms and individuals. Individuals who want to trade must do so through a broker firm who is a member of the exchange.
What is Euro dollar market?
Euro-dollar market is the creation of the international bankers. It is simply a short-term money market facilitating banks’ borrowings and lendings of U.S. dollars. The Euro-dollar market is principally located in Europe and basically deals in U.S. dollars. It is one of the largest markets for short-term funds.
What money term refers to a US dollar used in the money markets of Europe?
What are Eurodollar futures contracts?
Eurodollar futures contracts are futures contracts whose values derive from the interest-yielding U.S. dollar deposits held outside of the US. In other words, the price of the Eurodollar futures moves in response to the interest rate offered on U.S. dollar deposits held in foreign banks, specifically London banks.
What are swap futures?
Swap futures offer interest rate swap exposure with the margin efficiency, simplicity and safety of a standardized futures contract. CME Group has worked with market participants to develop a plan for transitioning price alignment and discounting for Swap futures from EFFR to SOFR.
What is the history of the Eurodollar?
The Chicago Mercantile Exchange (CME) launched the eurodollar futures contract in 1981, marking the first cash-settled futures contract. The underlying instrument in eurodollar futures is a eurodollar time deposit, having a principal value of $1 million with a three-month maturity.
How does Libor affect futures trading?
For example, if an investor buys one eurodollar futures contract at $96.00 and the price rises to $96.02, this corresponds to a lower implied settlement of LIBOR at 3.98%. The buyer of the futures contract will have made $50. (1 basis point, 0.01, is equal to $25 per contract, then a move of 0.02 equals a change of $50 per contract.)
