The Eurodollar futures contract is the most widely traded and versatile interest rate futures product in the world. It provides a valuable, cost-effective tool for hedging interest rate fluctuations on Eurodollars – U.S. dollars deposited in commercial banks outside the United States. Eurodollar deposits play a major role in the international capital market, and have long served as a benchmark interest rate for corporate funding.
Eurodollar futures provide a way to:
- Hedge short term interest rate risk
- Execute a variety of trading strategies, such as Butterflies, Packs and Bundles
- Express a view on the direction of interest rates
Things to know:
- Eurodollar futures reflect the London Interbank Offered Rate (LIBOR) for a 3-month, $1 million offshore deposit maturing at some point in the future
- More than 85% of Eurodollar futures now trade electronically on the CME Globex platform
- Available virtually around the clock, around the world
- Complete price transparency and anonymity
- Market prices universally available in real time
- Product also trades side-by-side on the CME Group trading floor during open outcry trading hours
- CME Clearing clears and settles all trades and guarantees counterparty creditworthiness
- Flexibility
- Contracts extend over 10 years to address a wide range of objectives
- Additional products offer expanded flexibility:
- Concentrated liquidity
- Consistently tight bid/ask spreads and lower transaction costs
- Price transparency
- Open, fair and anonymous trading environment
- Market prices universally available in real-time
- Variety of trading opportunities, including:
- Outright long or short positions
- Spreading against other instruments
- Hedging and arbitrage strategies
- Ease of trading
- Electronic trading on CME Globex provides
- Reduced connectivity costs
- Increased accessibility
- Fast, efficient trading
- Implied electronic spread functionality
- 3-, 6-, 9-, 12-, 15- and 18-month Calendar spreads are implied along the entire length of the Eurodollar futures curve
- 3-, 6- and 12-month Butterfly spreads are implied along the entire length of the Eurodollar futures curve
- Pack Spreads implied through the first Orange contract
More about Eurodollars
- Eurodollar deposits are direct obligations of the commercial banks accepting the deposits
- They are not guaranteed by a government entity
- Although they represent low-risk investments, Eurodollar deposits are not risk-free
- Eurodollar futures and options lead the industry with open interest exceeding 40 million and average daily volume of 3.0 million [update with end 07 data]
- Through December 2007, Eurodollar futures and options on futures set a record pace, trading over 500 [update with end ‘07 data] million contracts
- Since CME launched Eurodollar futures in 1981:
- They have evolved into one of the world's most innovative and popular contracts
- They are now the most actively traded futures contract in the world, with open interest recently surpassing the X million mark
- Due to their exceptional adaptability and versatility, they continue to evolve due to nonstop enhancements
- They now offer even more trading opportunities than when they were first launched
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