Ever since World War II, the amount of U.S. Dollars abroad sharply increased. This meant that foreign banks had U.S. Dollars in their custody and their jurisdiction. Today, the Eurodollar is similarly not under the jurisdiction of the Federal Reserve because it is a U.S. Dollar time deposit held in foreign banks. There are higher margins on the Eurodollar because of fewer regulations. A common use for Eurodollar futures contracts is for a company or a bank to secure the current interest rate on money it expects to borrow at a later time.
Eurodollar futures have achieved remarkable success since their debut in December 1981. Much of this growth may directly be attributed to the fact that Eurodollar futures represent fundamental building blocks of the interest rate marketplace. Indeed, they may be deployed in any number of ways to achieve diverse objectives. Pricing patterns in the Eurodollar futures market are very much a reflection of conditions prevailing in the money markets and moving outward on the yield curve.
The futures contract trades on Globex, the CME Group’s electronic exchange. The market opens at 5:00 PM CT and closes the following day at 4:00 PM CT, Sunday through Friday. The market closes Friday afternoon and re-opens Sunday evening.
The contract is quoted in terms of the “IMM index.” The IMM index is equal to 100 less the yield on the security. For example, if the yield equals 0.750%, the IMM index is quoted as 99.250. If the value of the futures contract should fluctuate by one basis point (0.01%), this equates to a $25.00 movement in the contract value. The minimum allowable price fluctuation, or “tick” size, is generally established at one-half of one basis point, or 0.005%. Based on a $1 million face-value 90-day instrument, this equates to $12.50. However, in the nearby expiring contract month, the minimum price fluctuation is set at one-quarter basis point, or 0.0025%, equating to $6.25 per contract. The most common contract symbol is GE.
The performance bond or initial margin requirement to initiate one futures contract position is $303 (as of November 11, 2015). To control that futures position going forward the maintenance margin becomes $275 (as of November 11, 2015).
The futures contract month listings are the nearest forty months in the March Quarterly cycle: March (H), June (M), September (U), and December (Z), plus the four nearest “serial” months not in the cycle. For example, February (G), April (J), May (K), and July (N).
The futures contract’s Last Trading Day (LTD) is the second London bank business day before 3rd Wednesday of the contract month. Trading in expiring contracts terminates at 11:00 AM London time on the last trading day. The March 2015 Eurodollar contract LTD is March 16, 2015 for example.
The Eurodollar settlement procedure is the price of an expiring three-month Eurodollar futures contract equal to 100 minus the three-month Eurodollar interbank time deposit rate. The Eurodollar interbank time deposit rate is determined by the Ice Benchmark Administration Ltd. (IBA) LIBOR fixing on the second London bank business day immediately preceding the third Wednesday of the contract’s month of delivery. This value is then rounded to the nearest 1/10,000th of a percentage point per annum.
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