Lessons
- CFA Level 2: Derivatives Part 1 – Introduction
- What are Forward Contracts?
- Equity Forward Contracts
- Fixed Income Forward Contracts
- Currency Forward Contracts
- Forward Rate Agreements (FRA)
- Credit Risk and Forward Contracts
- Introduction to Futures Contracts
- Futures: Convergence of Spot and Futures Prices at Expiration
- Futures Prices vs. Forward Prices
- Contago and Backwardation
- Pricing Stock Index Futures
- Pricing Interest Rate/Treasury Bond Futures
- Pricing Currency Futures
- Eurodollar Futures
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.