Last Updated on 21 September, 2020 by Therobusttrader

The Eurodollar market is worth many trillion U.S. dollars, and it’s not directly regulated by any government agency. It is, by far, the largest means of financing international transactions. As of 1997, about 90 percent of all cross-border loans were made via the Eurodollar market, and most were through 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. On the CME platform, a Eurodollar contract is equivalent to a Eurodollar time deposit having a notional or face value of U.S.$1,000,000 with a three-month maturity.

Eurodollar Futures Contract Specifications
Symbol
ED
Exchange
CME
Tick Size
$6.25
Point Value
$2500
Contract Size
Eurodollar Time Deposit With a principal value of USD $1,000,000 with a three-month maturity.
March, June, September, and December
The second London bank business day prior to the third Wednesday of the contract expiry month.
Trading Hours
CME Globex: Sunday – Friday: 5:00pm – 4:00pm CT // Open outcry: Monday-Friday 7:20am – 2:00pm
Settlement
Cash settled
Last Trading Day
The second London bank business day before the third Wednesday of the contract expiry month.

 

 

What Are Eurodollars?

Eurodollars are time deposits denominated in U.S. dollars and are held at banks outside the United States, which could be foreign banks or overseas branches of American banks. Since the deposits are held outside the United States, Eurodollars are not under the jurisdiction of the Federal Reserve Board, so they are not subject to Fed’s regulations. As a result, these deposits are at a higher risk, which is why they carry higher interest rates.

Previously known as Eurobank dollars, Eurodollar initially referred to U.S. dollars held in European banks only, but now, the definition has expanded to include U.S. dollar deposits held anywhere outside the United States. The origin of Eurodollars can be traced to the end of World War II and the beginning of the Cold War, as the Soviets tried to protect their U.S. dollar-denominated deposits in foreign banks from the U.S. government.

In 1981, the Chicago Mercantile Exchange launched the first Eurodollar futures contract. But what exactly are Eurodollar futures?

What Are Eurodollar Futures?

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. They are basically a LIBOR-based derivative, which reflects the London Interbank Offered Rate for a 3-month $1 million offshore deposit.

Foreign companies and banks use the Eurodollar futures to lock in the present interest rate for the money they intend to borrow or lend in the future. Corporations use Eurodollars to settle trans-border transactions, invest their excess cash, provide short-term loans, and finance imports and exports.

The Chicago Mercantile Exchange was the first to launch trading in Eurodollar futures, which was traded on the exchange’s 1500-trader-capacity upper trading floor — its largest trading pit. Now, other futures exchanges offer Eurodollar futures contracts, and most of the trading takes place electronically.

Why trade Eurodollar Futures

Traders have different reasons for playing the Eurodollars futures market. It could be for speculative purposes, hedging, or portfolio diversification. Others use it for arbitrage trading.

Speculation: Many traders in the Eurodollar futures market are there for speculation and nothing else. They are only interested in benefiting from the changes in the Eurodollar futures prices.

Hedging: Companies that are involved in international transactions and financing can use the Eurodollar futures to protect their finances from unfavorable interest rates in the future. Both individual investors and corporations use Eurodollar futures to hedge fixed income obligations, especially fixed income derivatives like swaps.

Portfolio diversification: Some investors and fund managers play the Eurodollar market as a way of diversifying their investment portfolio and spreading their risks across more asset classes.

Arbitrage trading: Arbitrage traders simultaneously buy and sell Eurodollar contracts on different platforms to benefit from any imbalance in prices.

Eurodollar Trading Strategies

Trading Strategy

Trading Strategy

Eurodollar trading strategies often balance up a portfolio quite nicely, by being uncorrelated against many other common markets. And if you, like us, trade algorithmically, you could easily add a eurodollar futures trading strategy without having to monitor another market, since the trading is automated.

If you want to get more inspiration for your own trading strategies, we highly recommend that you have a look at our edge membership!

Eurodollar Futures Seasonality

Here is a seasonal chart of the eurodollar futures market:

Eurodollar Futures Seasonality

Eurodollar Futures Seasonality

How Eurodollar Futures Trade

The Eurodollar futures contracts trade on the Chicago Mercantile Exchange (CME) Group and the Intercontinental Exchange, both of which have electronic trading platforms. So, the contract can be traded from any part of the world, almost 24 hours a day during weekdays.

On the CME platform, a Eurodollar contract is equivalent to a Eurodollar time deposit having a notional or face value of U.S.$1,000,000 with a three-month maturity. But being a leveraged instrument, only a margin of about U.S.$1,000 is required for a trader to carry the contract.

The contract is quoted in IMM three-month London Interbank Offered Rate (LIBOR) index points, which is 100 minus the 3-month LIBOR interest rate. For instance, if the rate is 5%, the contract shall be quoted as 95.00. One interest rate basis point equals .01 price points, which is equivalent to $25 per contract.

The minimum price fluctuation is as follows:

  • For the nearest expiring contract month, it is one-quarter of one interest rate basis point (0.0025 = $6.25 per contract).
  • For all other contract months, it is one-half of one interest rate basis point (0.005 = $12.50 per contract).
  • The “new” nearest contract begins trading in 0.0025 increments on the same trade date as the last trading day of the expiring “old” nearest contract.

Contracts are listed for Mar, Jun, Sep, Dec, extending to 10 years ( that’s a total of 40 contracts), plus the four nearest serial expirations (months that are not in the March quarterly cycle). The new March quarterly contract month terminating 10 years in the future is listed on the expiration day of the nearest quarterly contract month.

The last trading day is the second London bank business day before the third Wednesday of the contract expiry month. Trading in the expiring contracts stops at 11:00 a.m. London time, on the last trading day. The contracts are cash-settled at expiration.

Factors That Affect Eurodollar Futures

Here are some of the factors that affect the Eurodollar futures:

LIBOR: The Eurodollar futures price reflects the market gauge of the three-month U.S. dollar LIBOR interest rate expected on the settlement date of the contract. The three-month LIBOR is a benchmark for short-term interest rates at which banks can borrow funds in the London interbank market. Numerically, Eurodollar futures prices are expressed as 100 minus the implied 3-month U.S. dollar LIBOR interest rate. Thus, a reduction in the LIBOR rate means an increase in Eurodollar futures prices and vice versa.

Political events: Political events and government policies, such as trade wars and tariffs can affect international trades and cause problems for companies that depend on imports and exports. Since such companies actively use Eurodollars in their business, Eurodollar futures can be affected.

Conclusion

Eurodollar futures are futures contracts that have interest-yielding overseas U.S. dollar deposits as their underlying assets. Foreign companies use these overseas dollar deposits to finance their projects. The Eurodollar futures is actively traded on the CME and ICE electronic platform.

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