Interest Rate Futures Contracts 4
The margin on a eurodollars contract is just around $1,000. Because the contract size is $1,000,000, this represents 1/1,000, or a tenth of one percent. This is amazingly small.
Eurodollar contracts expires in March, June, September and December. It’s quoted in decimals, making it easier to read and understand. Usually it’s five digits, with the final one on the right representing a fraction of a point. It may look like 98.550.
Prices for eurodollars contracts varies with inflation rates, Federal Reserve policies, various political and economic events and policies.
They are quoted in terms of 100 – the yield of official British Bankers Association fixing of the 3-month LIBOR US dollar rate as of the settlement date.
In the financial crisis in the fall of 2008, eurodollars benefited from the flight to quality. When all financial instruments seemed to be at risk, people wanted their money in US dollars. That meant a huge demand in eurodollar securities, forcing the futures contracts higher.
Eurodollar securities are not quite as certain as T-bills issued by the United States, because they’re held by private banks, and therefore there’s some slight risk. However, they are U.S. dollars, and so demand drove the contracts to high levels, approaching 100, indicating an extremely low yield.
In such cases, people are a lot more concerned about the return of their money than the return on their money, as Will Rogers once quipped. They received almost no interest, but their principle was safe. That certainly wasn’t the case for stocks.
CME eurodollar futures contracts are often used to hedge interest rate swaps. They serve as a benchmark for corporate financing. The Chicago Mercantile Exchange instituted this futures contract in 1981.
The contracts are settled by cash. This is because it’s not possible to transfer time deposits from one bank to another.
The CME Group also offers eurodollar bundles. These allow traders and hedgers to buy and sell a consecutive series of contracts for a run of months in proportionate amounts.
Then there are eurodollar packs. These consist of the simultaneous buying or sale of a consecutive series of four Eurodollar futures.
And Serial eurodollars — quarterly Eurodollar futures with the exception of expiration dates. Serial Eurodollars expire in months other than those in the March, June, September and December quarterly cycles.
Because of their high margins, low volatility (except during financial crisises) and high liquidity, eurodollar futures are good for traders, but of course it helps to understand what drives interest rate changes around the world.
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