Eurodollar futures

MacroVar monitors the Eurodollar futures market to monitor market expectations for central bank monetary policy (rate hikes/cuts), financial markets and economic outlook.

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Eurodollar futures are interest-rate financial futures contracts specific to the Eurodollar, which is a U.S. dollar deposit in commercial banks outside of the United States. Eurodollar plays a major role in the global financial markets. The interbank market for offshore dollars is very liquid, providing banks with the ability to fund dollar loans.

Eurodollar futures contracts

What Are Eurodollar Futures

Eurodollar futures are financial derivatives contracts that allow market participants to hedge or speculate on changes in short-term interest rates. These futures contracts are based on the Eurodollar deposit, which is a U.S. dollar deposit held in banks outside of the United States, typically in European banks. Eurodollar deposits are often used by international businesses and financial institutions for various purposes, including financing international trade and managing foreign exchange risk.

Here are some key features of Eurodollar futures:

1. Underlying Instrument: The underlying instrument for Eurodollar futures is the interest rate on Eurodollar time deposits, which is essentially the interest rate at which banks lend U.S. dollars to each other in the Eurodollar market.
2. Contract Specifications: Eurodollar futures are standardized contracts traded on various futures exchanges, such as the Chicago Mercantile Exchange (CME). Each contract represents a specific notional value of Eurodollar time deposits and has a fixed expiration date. The most actively traded Eurodollar futures contract is the 3-month contract, although there are contracts with different maturities.
3. Pricing: Eurodollar futures are priced based on the implied interest rate. The contract price is 100 minus the interest rate, so if the contract price is 98.00, the implied interest rate is 2.00%.
4. Settlement: Eurodollar futures contracts are cash-settled. At the contract’s expiration, the final settlement price is determined by the actual average interest rate on Eurodollar time deposits for the specified period. Traders profit or incur losses based on the difference between the contract price and the final settlement price.
5. Hedging and Speculation: Traders use Eurodollar futures for various purposes. Some use them to hedge against interest rate risk, especially in cases where they have exposure to short-term interest rates. Others use them for speculative purposes, attempting to profit from anticipated changes in interest rates.
6. Liquidity: Eurodollar futures are among the most liquid interest rate futures contracts, making them attractive to traders and investors.
7. Interest Rate Expectations: Changes in the prices of Eurodollar futures can provide insights into market expectations regarding future interest rate movements. For example, if Eurodollar futures prices rise, it suggests expectations of lower interest rates, and if they fall, it suggests expectations of higher interest rates.

Eurodollar futures are a crucial tool for financial market participants to manage interest rate risk, implement trading strategies, and gain exposure to short-term interest rates. They are widely used by a range of market participants, including banks, hedge funds, corporations, and individual traders.