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Eurodollar futures.

E

Elroy

Member
Why are eurodollar futures specified the way they are?

Why not specify as per FRAs and cash settle at 3-months after the settlement date (or discount the difference at the prevailing market rate and cash sttele at the settlment date).

Hope I'm not being dense!
 
I think the answer is as simple as a FRA is a forward agreement while the Eurodollar is a future. The forward agreement carries large settlement and hence counter-party risk. The future doesn't. (The Eurodollar contract is margined daily like any future)
 
In section 6.3 of Hull's book (9th-global), it says that "Table 6.1 shows that the interest rate term structure in the US was upward slopping in May 2013". I don't understand what this means. My interpretation is as below.
  1. Upward sloping term structure means that 10 year spot rate is higher than 1 year spot rate (zero coupon) and alike. Right?
  2. In Table 6.1, all Eurodollar futures are based on 3-month LIBOR. That is, they are interest for the same maturity (3 months). The difference is when the 3-month period would start. How is this linked to term structure for different maturities mentioned in 1?
Thank you!
 
Hi Xu,

Here is my take on your questions:

1. Your interpretation seems correct to me.

2. The link can be understood by considering the relationship between forward rates and spot rates. If the spot rates are increasing, then so will the forward rates. SInce the Eurodollar futures are based on current forward rates, they will also show an increasing trend with respect to the start periods.

Hope this makes sense!

Thanks,
Kaustav
 
KaustavSen said:
Hi Xu,

Here is my take on your questions:

1. Your interpretation seems correct to me.

2. The link can be understood by considering the relationship between forward rates and spot rates. If the spot rates are increasing, then so will the forward rates. SInce the Eurodollar futures are based on current forward rates, they will also show an increasing trend with respect to the start periods.

Hope this makes sense!

Thanks,
Kaustav
Click to expand...

Thank you, Kaustav. :)
It makes sense to me now.
Regards,
Xu
 
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