Last Updated on 11 September, 2023 by Samuelsson
Eurodollar futures contracts are futures contracts whose values derive from the interest-yielding U.S. dollar deposits held outside of the US.
The Eurodollar futures contracts are trading on the Chicago Mercantile Exchange (CME) Group.
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.
The Eurodollar is worth and is trading for 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 market.
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. It can also be held in the US but it needs to be in a foreign bank.
Eurodollar Trading Strategies
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.
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Eurodollar Futures Contract Specification
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.
What are Eurodollars used for?
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 were 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.
What are Eurobank dollars?
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.
When did Eurodollar trading start?
In 1981, the Chicago Mercantile Exchange launched the first Eurodollar futures contract. But what exactly are Eurodollar futures?
What is the difference between a Eurodollar and the Euro?
The difference between Eurodollars and Euro is that the Eurodollar are dollar held outside the US banking system and Euro is a currency of the European Unionon. Eurodollar can be US dollars held in Sweden, Russia, and the UK for example. The Eurodollar can even be held in the US if it is in a foreign bank in the US. The Euro is a currency. So there is a very big difference between Eurodollar and the Euro.
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 Futures Seasonality
Here is a seasonal chart of the eurodollar futures market:
Where can you trade Eurodollar Futures, what exchanges?
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 for Eurodollar futures
- 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.
What Factors move the Eurodollar Futures up and down
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.
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 are actively traded on the CME and ICE electronic platforms.
Here is our archive with articles about other tradeable futures markets.