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Unit 10: Interest Rate Derivatives and Euro-Dollar Derivatives
The International Monetary Market (IMM) a division of the Chicago Mercantile Exchange, trades Notes
Eurodollar futures. Other exchanges, including London, Tokyo and Singapore, also trade
Eurodollar futures. This makes the market for this contract a virtually continuous market.
The face value for a futures contract is $1,000,000 and it is traded for settlement in March, June,
September and December. The contract is defined on the spot 3 month Eurodollar deposit rate.
Contrary to T-bill futures, the Eurodollar futures are settled for cash and are the most actively
traded short term interest contract.
Example: At the close of trading on February 13, 1995 the open interest (i.e., the number
of futures contracts currently open) reported by The Wall Street Journal for the March Eurodollar
future's contract was 398,971. In contrast, the open interest at this time on the March T-bill
futures contract was only 9,524.
As part of this settlement procedure, on the last trading day, the IMM samples twelve dealing
banks for the 3 month Eurodollar quotations. After eliminating the top two and the lowest two,
the settlement price is computed as an average rate, and convergence is forced between the
futures price and the spot price at this time.
The Eurodollar future is quoted on an index basis 100 minus the LIBOR on the corresponding
Eurodollar contract. The day count for futures contracts is actual days over a 360 day year.
Example: In The Wall Street Journal, April 19,1994, the June Eurodollar futures had a
settlement price of 100 - 0.0466 = 95.34 and therefore the settlement yield was 4.66%. One basis
point change in this 3 month contract equals $25 ($25 = 0.0001 × 1,000,000 × 0.25).
This contract provides investors with an alternative method for locking in a forward rate. Under
the assumption that the future's price equals the forward price, the relationship between futures
prices and forward Euro prices implied from the current Euro-yield curve can be contrasted.
Notes Features of Euro-dollar Derivatives
Eurodollar futures work the same as T-bill contracts except the rate is based on LIBOR. The
following are the key features of Euro-Dollar derivatives:
1. Price quotes and actual price is determined the in the same way as for T-bills
2. Settles in cash
3. One of most active contracts in the markets
4. Instead of add-on interest, (for example a 100 @ 10% for a year and the bank would
owe $110 dollars), the rate is subtracted from 100, just as it is with T-bills
5. With T-bills the investor would receive $1 million per contract, while in the Eurodollar
futures market the firm would pay 1 million euros.
Self Assessment
Fill in the blanks:
6. The Eurodollar future is quoted on an index basis 100 minus the ………… on the
corresponding Eurodollar contract.
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