Level: Intermediate

Short Term Interest Rate (STIR) markets remain a critical product within the fixed income asset class and are closely watched by investors keen to track central bankers’ policy moves. By far the largest of them all is the CME-traded Eurodollar futures market for 90-day liabilities.

Contributed By: CME Group

The Eurodollar futures contract is one of the largest and most successful interest rate-based contracts.

IMM stands for the International Monetary Market. Interest Rate products that have an original maturity of less than 366 days, trade in what is commonly referred to as the “Money Market”.

Some futures contracts are cash-settled, others are settled via physical delivery.

A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument.

To understand the convexity bias, you must understand the parallels between the Eurodollar futures market and the forward rate agreement (FRA) market. Both of these markets are large, liquid and have a vast influence on short-term interest rate pricing.

This module will cover the basic spread strategies used in Eurodollar futures including calendar or yield curve spreads.

One of the key reasons the Eurodollar contract has become so liquid and successful is because of hedgers using the market to hedge against adverse interest rate fluctuations.

A Forward Rate Agreement (FRA) is a forward contract on interest rates. While FRAs exist in most major currencies, the market is dominated by U.S. dollar contracts and is used mostly by money center banks.

Previously, we discussed how market participants can use Eurodollars to hedge floating rate loans by using strips of Eurodollar futures. You might choose to hedge a one-year loan (hedge against higher interest rates) with quarterly reset dates by selling four quarterly Eurodollar futures contracts in what is known as a strip hedge. The strip consists of quarterly ED futures strung together.

Eurodollar Term Mid-Curves, the newest addition to options on Eurodollar futures, offer short-dated options on the deferred white quarterly contracts. Eurodollar, Mid-Curve and Term Mid-Curve are options on Eurodollar futures.