Eurodollar Futures

Eurodollar: Eurodollar refers to a U.S. dollar denominated deposit in a bank outside the U.S. and thus outside the jurisdiction of the Federal Reserve System.

Eurodollar Future: A Eurodollar Future is a future contract for a notional Eurodollar deposit amount, whose value at expiration is based upon the term relevant LIBOR rate on the expiration date.

A Eurodollar future is comparable to a forward rate agreement.

Unlike other futures and forwards, Eurodollar futures face a pricing challenge because pure risk-free arbitrage is not possible.

  • An arbitrageur cannot simultaneously take a position in the asset and the Eurodollar future because the net value at expiration is not certain.
  • Both the value of the Eurodollar deposit and the Eurodollar future are dependent upon the relevant LIBOR rate and these cannot be offset.
  • As an underlying asset, a Eurodollar pays incremental interest on top of a deposit; compare that to a Treasury bill, which is a discount instrument.
  • Despite these pricing challenges, Eurodollar futures can still be an effective instrument for hedging exposure to floating interest rates.

This content is for paid members only.

Join our membership for lifelong unlimited access to all our data science learning content and resources.