Markets Home

Active trader

Hear from active traders about their experience adding CME Group futures and options on futures to their portfolio.

Find a broker

Search our directory for a broker that fits your needs.

CREATE A CMEGROUP.COM ACCOUNT:

MORE FEATURES, MORE INSIGHTS

Get quick access to tools and premium content, or customize a portfolio and set alerts to follow the market.
Market Data Home

Real-time market data

Stream live futures and options market data directly from CME Group.

E-quotes application

Access real-time data, charts, analytics and news from anywhere at anytime.

CME DATAMINE:

THE SOURCE FOR HISTORICAL DATA

Explore historical market data straight from the source to help refine your trading strategies.
Services Home

Uncleared margin rules

Understand how CME Group can help you navigate new initial margin regulatory and reporting requirements.

Calculate margin 

Evaluate your cleared margin requirements using our interactive margin calculator.
Education Home

FX Insights from Macro Hive

Receive exclusive insights on key FX macro themes, volatility trends, and market events through our bi-weekly report.

Create a CMEGroup.com Account: More features, more insights

Get quick access to premium educational content, including expert-led webinars, a real-time trading simulator, and more.
      Course Overview
      • What is ICE LIBOR/What is Eurodollar
      • Understanding IMM Price and Date
      • What is the Eurodollar Settlement Process (cash settled)
      • The Importance of Basis Point Value (BPV)
      • Understanding Convexity Bias
      • Eurodollar Intramarket Spreads
      • Understanding Eurodollar Strips
      • The Link Between Eurodollar Futures Pricing And The Forward Rate Market
      • Understanding Packs and Bundles
      • Term Mid-Curve Eurodollar Options
      Introduction to Eurodollars
      You completed this course.Get Completion Certificate

      Understanding Eurodollar Strips

        • Also available in

        • 한국어

      Video not supported!

      One of the key reasons the Eurodollar contract has become so liquid and successful is because of hedgers using the market to hedge against adverse interest rate fluctuations.

      Because Eurodollar futures move inversely with interest rates, if you are concerned about rising rates, you can sell Eurodollar futures and if  you are concerned about declining rates, you might buy Eurodollar futures.

      Many loans are structured such that the rate floats periodically (i.e. the interest rate is reset quarterly) as a function of ICE LIBOR plus a fixed premium. This introduces a periodic risk that rates may fluctuate before the time of each periodic loan reset date. Eurodollar futures may be used to address this possibility to the extent that they are listed on a quarterly basis extending 10 years out into the future.

      Eurodollar Strip Example

      There exist various strategies for hedging with Eurodollars involve stacking and stripping futures contracts as well as products called packs and bundles, which are packaged strips.

      Assume that it is March 2017 and a corporation assumes a two-year bank loan repayable in March 2019 for $100 million. The loan rate is reset every three months at ICE LIBOR plus a fixed premium. As such, the loan may be deconstructed into a series, or strip, of eight successively deferred three-month periods. Note: If the loan is secured currently, the effective rate may be fixed at the current rate for the first three months. Thus, there is no risk over the first three-month period between March and June 2017. However, the corporation remains exposed to the risk that rates advance by each of the seven subsequent loan rate reset dates.

      Considering that the floating rate loan may be decomposed into seven successively deferred 90-day loans. The BPV associated with each of those seven loans equals $2,500.

      BPV = $100,000,000 x (90÷360) x 0.01% = $2,500

      The corporation might sell 100 Eurodollar futures in successive quarterly contract months to match the seven successive quarterly loan reset dates. Therefore, one might effectively hedge each of the seven loan periods independently. This transaction is often referred to as a strip hedge, or a series of short (or long) Eurodollar futures in successively deferred contract months to hedge the risk of rising (or declining) rates, respectively.

      Reset Date Action to Hedge Rate Reset
      June 2017  Sell 100 Jun-17 futures
      September 2017 Sell 100 Sep-17 futures
      December 2017 Sell 100 Dec-17 futures
      March 2018 Sell 100 Mar-18 futures
      June 2018 Sell 100 Jun-18 futures
      September 2018 Sell 100 Sep-18 futures
      December 2018 Sell 100 Dec-18 futures

      Conclusion

      If rates climb higher over the term of the loan, the short Eurodollar futures contracts would be profitable as the futures decline as rates rise. The profit on the strip of Eurodollar futures would offset the increase borrowing costs effectively locking in a lower rate.

      Corporate treasurers and bank asset liability mangers are particularly aware of fluctuations in interest rates as borrowing and lending rates directly influence profitability. They have many tools available to hedge their interest rate exposure and on the Eurodollar or ICE LIBOR side of the business, there is no better instrument.

      Indeed, the hedging community has embraced strip hedging so enthusiastically that CME Group has launched a variety of pre-packaged strips that are called packs and bundles. 


      Test your knowledge

      Related Courses
      /content/cmegroup/en/education/courses/introduction-to-eurodollars/understanding-eurodollar-strips
      • {{ course.name }}
      Previous Lesson
      Next Lesson
      Course Overview
      Get Completion Certificate
      Previous Lesson Next Lesson
      • YouTube
      • Twitter
      • Facebook
      • LinkedIn
      • Instagram
      • Rss

      CME Group is the world's leading and most diverse derivatives marketplace. The company is comprised of four Designated Contract Markets (DCMs). 
      Further information on each exchange's rules and product listings can be found by clicking on the links to CME, CBOT, NYMEX and COMEX.

      © 2021 CME Group Inc. All rights reserved.

      Disclaimer  |  Privacy Policy  |  Cookie Policy  |  Terms of Use  |  Data Terms of Use  |  Modern Slavery Act Transparency Statement  |  Report a Security Concern