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I just found out about eurdollar futures and I am confused.

A eurodollar future contract is defined as a cash settled future based on a Eurodollar Time Deposit having a principal value of USD $1,000,000 with a three-month maturity.

Suppose that a a bank decides to sell 5 eurodollar futures that settle in three months. What exactly does it mean ?

What is going to happen when the constract expires?

Same question if the bank decides to buy 5 eurodollar contracts.

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all (STIR) short term interest rate futures are cash settled [see comment, STIR in this context is -IBOR futures which are the most common in the largest markets] If a party sells 5 contracts at a price of 98.50, and at settlement the EDSP (exchange delivery settlement price) (which is derived from 3M US LIBOR) is, say, 98.40 then the bank has made a profit of 10 cents or 10 basis points.

The overall profit is 5mm (notional) * 0.0010 (price chg) * 0.25 (quarter of year) = $1,250.

Rather obviously, buying is the opposite of selling, and would constitute a loss here.

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  • $\begingroup$ Thank you. So, the purpose of this contract is to lock in a desired interest rate in case you expect rate to increase ? $\endgroup$ – peter5 Nov 4 '17 at 21:05
  • $\begingroup$ They allow you to hedge against movements in interest rates or speculate on such movements. $\endgroup$ – Alex C Nov 5 '17 at 0:24
  • $\begingroup$ It is technically not true that all STIR futures are cash settled. For example, the Australian 90-day accepted bank bills futures contract is settled by delivery of bank bills. $\endgroup$ – RRG Nov 5 '17 at 11:37
  • $\begingroup$ I would add that in the US, the most liquid market is for 3 month underlying deposits, and there are contracts expiring on the 3rd wednesday of each march, june, september and december. $\endgroup$ – dm63 Nov 5 '17 at 14:58

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