2
$\begingroup$

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.

$\endgroup$

1 Answer 1

3
$\begingroup$

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.

$\endgroup$
4
  • $\begingroup$ 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, 2017 at 21:05
  • $\begingroup$ They allow you to hedge against movements in interest rates or speculate on such movements. $\endgroup$
    – Alex C
    Nov 5, 2017 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, 2017 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, 2017 at 14:58

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.

Not the answer you're looking for? Browse other questions tagged or ask your own question.