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Can anybody please explain in layman terms why the DV01 of a eurodollar futures contract is 25? I can mathematically calculate in different ways, but not able to convince myself, especially how is it still $25 if somebody is buying a contract in the middle of the 3-month period. Thanks.

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  • $\begingroup$ Have a look at page 8 of this CME pdf $\endgroup$ – user508 Apr 15 '14 at 1:51
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ED contracts are quoted as: $100-LIBOR_{3M}$, where the three-month LIBOR rate is annualized.

For instance, an annualized rate of 3.00% would yield a quote of 97. A one basis point change would now yield a quote of 96.99 or 97.01, resulting in a loss or gain in \$25.

By construction, the DV01 is \$25, which effectively results in the fact that the underlying reference is roughly \$1,000,000 since each contract is for 1/4 of the year and $\$10^6 \times \frac{90}{360} \times 0.0001 = \$25$ (although the precise amount varies with the days in the period). Really, depending upon the interval day count, it is possible to have notional values from \$1.046M to \$0.947M.

So really the answer to your question is because the CME defines the contract that way.

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Jacob nailed it, but I'll add something else that might have been confusing you.

You can never buy eurodollar futures part way through the 3-month period. They always have 3 month of life to them, starting just after the expiration of the futures contract. So they will always be paying/receiving 3 months worth of interest. And therefore Jacob's math applies.

If you could enter into eurodollar futures after the start of the term, then the DV01 would diminish over time, as you expected. But that product doesn't exist as a futures contract.

Jacob's math is made simpler and more accurate because eurodollar futures are cash settled, so there isn't really a term at all. It's just a formula that the CME asserted, which vaguely replicates a 3 month loan/deposit.

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  • $\begingroup$ Awesome..So, does it mean I can't buy June 2014 ED contract now, because the 3 month period already started? But they are ticking on CME and people can buy and sell right? How do I understand these intricate details, I poured over the web, but didn't really find those details. $\endgroup$ – endless Apr 16 '14 at 3:17
  • $\begingroup$ @endless You can trade M4 contracts now. It will expire on June 16th. The deposit/loan that it models starts after that. Quoting CME contract specs: "Eurodollar interbank deposit having approximately $1 million principal value, for three-month term to maturity, for spot settlement on the 3rd Wednesday of the contract month." So it takes its benchmark from loans starting June 18th for a 3 month term. Check cmegroup.com contract specs. If this is worth a book purchase to you: amazon.com/dp/0071418555. $\endgroup$ – RaveTheTadpole Apr 16 '14 at 14:58
  • $\begingroup$ thx @RaveTheTadpole i will certainly get the book. $\endgroup$ – endless Apr 17 '14 at 2:51

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