Financial futures have grown explosively since being introduced by the CME in 1972. The single largest source of that growth has been CME interest rate products, particularly Eurodollar futures and options.
Launched on December 9, 1981, Eurodollar futures have evolved into one of the world's most popular contracts, and one of the most innovative. Their flexibility and adaptability is unsurpassed. The contracts' exceptional growth has come hand-in-hand with nonstop enhancements. As a result, today's Eurodollar complex bears little resemblance to that of only several years ago.
To keep you up to date on the latest contract features, and to answer the questions users most frequently ask about Eurodollar futures and options contracts, we have compiled the following list.
Eurodollar futures cease trading at 5:00 a.m. Chicago Time (11:00 a.m. London Time) on the second London bank business day immediately preceding the third Wednesday of the contract month; final settlement price is based on the British Bankers' Association Interest Settlement Rate.
Eurodollar futures reflect market expectations of forward 3-month rates. An implied forward rate indicates approximately where short-term rates may be expected to be sometime in the future.
The following formula provides a guideline for calculating a 3-month rate, three months forward:
1 + 6mth spot rate x 182/360 = (1 + 3mth spot rate x 91/360) (1 + 3mth fwd rate x 91/360)
For example: 3-month LIBOR spot rate = 5.4400%
6-month LIBOR spot rate = 5.8763%
3-month forward rate = R
1 + .058763 x 182/360 = (1 +.0544 x 91/360)(1 + R x 91/360) 1.029708 = (1.013751)(1 + R x 91/360) 1.015740 = (1 + R x 91/360) 0.062270 or 6.227% = R = the implied forward rate
This concept describes the difference in the yields quoted for T-bill and Eurodollar contracts. T-bills are sold at a discount to face value and redeemed at par. The difference between par value and the T-bill's price is the interest paid. Interest on ED deposits is "added on" to the principal loan amount.
An example of add-on interest with Eurodollars: You borrow $1 million for three months at 5.50%. The 5.50% of interest is "added on" to the $1 million principal amount. The interest due (assuming a 91-day loan) is equal to $1 million x .055 x 91/360 = $13,903.
An example of discount yield with T-bills: You sell $1 million face value of 91-day T-bills at an annual discount yield of 5.50%.
Discount = $1 million x 0.055 x 91/360 = $13,903
T-bill Price = $1 million -$13,903 = $986,097
Money Market Yield = $13,903/$986,097 x 360/91 = 5.578% (comparable to ED "add-on" rate)
The Eurodollar tick reflects the dollar value of a 1/100 of one percent change in a $1 million, 90-day deposit. It is determined by this equation:
$1,000,000 notional x .0001 x 90/360 = $25
The price of a bundle or pack is quoted in terms of the average net change from the previous day's settlement prices for the entire group of contracts in the pack or bundle.
Bundles and packs are quoted in minimum .25 tick increments; however, whole-basis-point prices are assigned to the individual legs of the trade. Prices are assigned to reflect fractional combination prices beginning with the most deferred contracts, and working forward.
The "lead" month is considered to be the contract with the highest daily volume, currently based on a 12-day moving average, calculated on every business day, beginning five weeks after the previous contract expiration.
You must notify your clearing firm, and your clearing firm must notify the Clearing House, by 7:00 p.m. The Clearing House can be contacted at 312-207-2525.
Following the expiration of a quarterly Eurodollar futures contract, a fortieth quarterly contract is available to trade the following business day. Since the vast majority of Eurodollar futures contracts expire on a Monday, the new contract is generally available on the Tuesday following a Monday expiration day.
The lag between expiration of the near month future and the listing of the fortieth Eurodollar contract results in a one-day delay in listing a new "Copper" (Year 10) pack after the expiration of the front quarterly future.
Automatic expiration takes place only at expiration and not before. To be automatically exercised at expiration, an option needs only to be in-the-money by the smallest price increment possible (e.g., a quarter tick).
At expiration, all in-the-money Eurodollar options are exercised automatically, in the absence of contrary instructions delivered to the Clearing House.
You will be informed before the markets open on the following business day that you have been assigned, and you'll be assigned a futures position as of the day the assignment was made. Assignments are made through a process of random selection of clearing firms with open short positions in the specific option.
Cabinet in Eurodollar options is the minimum premium value of $6.25 or "1/4 tick."
Quarterly and Serial options: On the expiration day of options in the March quarterly cycle, strike prices in 12.5-point increments will be listed on the two serial, and next March quarterly option expirations.
For example, on Monday, September 13, 1999 (expiration day for Sep 99 futures and options), 12.5-point strike prices would be listed on October and November serial options, and December quarterly options.
One-year Mid-Curve options ("shorts"): the first quarterly and two serial expirations are eligible to trade in 12.5-point strike price increments at any given time.