Eurodollar futures have always been an important benchmark for interest rates and credit risk. Investors will be watching them even more vigorously in today’s highly volatile COVID economy. While the average investor may not know much, Eurodollar futures prices are an important indicator of interest rates and credit demand for professional investors. As such, they can be very useful in trying to determine the direction of future economic activity.
Surprisingly, the term “eurodollar” applies to any currency that is not held within its borders, and not just US dollars held in Europe. In other words, Eurodollars are US dollars held in foreign banks. Adding the euro prefix to the currency of interest is also an acceptable form – the Japanese yen held in China can be referred to as Euroyen.
What are Eurodollar futures?
The phrase “euro / dollar” (which looks exactly like “eurodollar”) refers to the EUR / USD currency pair, while “eurodollar” refers to US dollars held outside the United States. It is actually a term deposit denominated in US dollars. detained abroad from the United States
The Eurodollar is one of the many types of futures contracts. The price of a Eurodollar futures contract is calculated using the equation below:
Contractual International Money Market Index (IMM) = 100 – LIBOR
For example, if a Eurodollar futures contract trades at $ 97.00, the implied 3-month LIBOR settlement rate is 3% on a $ 1 million offshore deposit. Price and yield have an inverse relationship.
The Eurodollar futures contract is one of the most popular electronically traded futures contracts on the Chicago Mercantile Exchange (CME). Open interest and overnight volume of Eurodollar futures outperforms crude oil, treasury bills and E mini S&P 500 futures. It also has the distinction of being one of the first cash-settled futures contracts since its introduction in 1981.
Hedges can be put in place using Eurodollar futures contracts against rising or falling interest rates. Corporate borrowers typically seek to protect against rising rates, while lenders seek to protect against falling rates. Retail traders can use Eurodollar futures contracts to use trading methods such as spreading contracts. Eurodollar futures contracts normally exhibit low daily volatility, high liquidity, and relatively smooth long-term trends, making them a suitable choice for some non-directional trading strategies.
Best brokers for Eurodollar futures
Since the Eurodollar is a very popular financial instrument, you can trade it with almost any reputable futures broker that offers a US futures contract execution service. Make sure you have good trading software to actually execute your trades.
How much does a Eurodollar futures contract cost?
Eurodollar futures have a notional value that you can find through a defined multiple of the IMM index of the underlying contract, or international money market index. The present value of each contract can be calculated as follows:
1 Eurodollar futures contract = $ 2,500 x IMM index of the contract (100 minus R where R = three-month London Interbank Offered Rate (LIBOR) for cash settlement on the 3rd Wednesday of the month of the contract)
A movement of 1 basis point in a Eurodollar futures contract (0.01) corresponds to $ 25 per contract. For example, a change of 0.03 means a gain or loss of $ 75 for a trader with 1 contract based on a movement of 3 basis points to $ 25 per basis point.
You will likely need to open a margin account with your broker before trading Eurodollar futures. You can control a long or short position with margin. The broker provides the rest of the capital for the contract (s). You will also need to keep a certain amount of money in your account to keep the transaction open. This is called the maintenance margin.
Your maintenance margin may change depending on your broker’s terms of service. It is also much more often affected by market movements. If your position is losing money, the holding margin increases, but if the value of the position increases, the margin required to hold it will generally decrease. You may receive a margin call if the value of your contract falls below your broker’s margin requirements. The margin call is a communication that asks you for additional capital to keep the trade open. If you can’t meet him, the broker will usually close your trade.
Outlook on Eurodollar Futures
Eurodollar futures specialist Larry Berman expects the Eurodollar yield curve to reverse in mid-2021. An inverted yield curve corresponds to a short-term credit crunch because it represents short-term borrowing rates that are higher than long-term rates. In an over-leveraged US market, a credit crunch can mean a deep recession.
The eurodollar yield curve also predicted a slower 2020, even without the coronavirus. Currently, both the curve and the contract prices correspond to a market with relatively normal liquidity and credit flow. This liquidity and flow, however, is artificially injected into global economies through central banks and government support payments to businesses and individuals. If any aspect of this volatile pattern were to change, the market could suffer substantial losses as insolvencies increase, loan repayments fail and affected currencies weaken.
What time do Eurodollar futures open?
You can also trade Eurodollar futures on the Chicago Mercantile Exchange (CME) Globex electronic trading platform Sunday through Friday, 6 p.m. to 5 p.m. Eastern Standard Time.
Eurodollar futures trade on the International Currency Exchange (ICE) Sunday through Friday, 7:45 p.m. to 5:00 p.m. EST. A pre-market opens at 7:30 p.m. EST Sunday through Friday.
Strategies for Eurodollar Futures
The Eurodollar futures market is a patient trading market. Market trends tend to last quite a long time and changes in the market are not as violent as those in the securities market, for example. Here are some popular types of strategies that sophisticated investors use in the Eurodollar futures market.
- Scalping: You may want to try and take advantage of very small movements so that you can get in and out quickly and close positions before you retire for the day.
- Contract deviations: A trader will simultaneously buy and sell futures contracts with different expiration dates. If you think that long-term interest rates will rise faster than short-term interest rates, you would buy the longer-term future and sell the shorter-term future. The reverse applies to a flattening yield curve.
Getting around with the market
Although some experts avoid the question, the trillions of dollars the United States has digitally printed to float the economy will eventually change the nature of the way the world does business with the dollar. You may be able to predict how the market will react by using the Eurodollar futures market and the yield curve to your advantage.
If you like to follow the flow of money in the market, the Eurodollar is a vital benchmark that you should understand closely. Eurodollar futures are a great way to hedge or speculate on movements of the US dollar against other currencies. Eurodollars are used to take on or reduce interest rate risk.
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