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What Are Eurodollar Futures?

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  • Managed Futures 101

When our clients see Eurodollars futures being traded in their CTA accounts, they sometimes think that it is the Euro/USD currency pair.  Eurodollars actually have nothing to do with Europe's currency.  Eurodollars are interest bearing bank deposits denominated in US Dollars and held at banks outside of the United States. Since these bank deposits are held outside the U.S., they are outside the jurisdiction of the US Federal Reserve, and subject to less regulation.  Due to this, the higher level of risk to investors is reflected in higher interest rates.

The Eurodollar Futures contract started trading on the Chicago Mercantile Exchange (CME) in 1981, marking the first cash settled futures contracts. When Eurodollar futures contracts expire, the seller of the contract can transfer the associated cash position rather than making delivery of the underlying asset.

What do Eurodollar futures measure?  The underlying instrument in Eurodollar futures is a eurodollar time deposit having a principal value of $1,000,000 with a three-month maturity. Eurodollar futures provide an effective means for companies and banks to secure an interest rate for money it plans to borrow or lend in the future. The Eurodollar contract can be used to hedge against interest rate changes over multiple years into the future. If interest rates rise, Eurodollar futures decrease, and if interest rates fall, Eurodollar futures increase.  Here is a current chart of December 2018 Eurodollar futures:

 
December 2018 Eurodollar Futures

 

As you can see Eurodollars futures are currently trading around 97.40, which implies an interest rate of 2.60% in December 2018.  If expected eurodollar interest rates in December 2018 were to rise to 3.60%, then December 2018 Eurodollars futures contracts would be trading down around 96.40. 

As an interest rate product, the policy decisions of the US Federal Reserve have a major impact on the price of Eurodollar futures. Trading Eurodollar futures can be quite volatile around FOMC meetings and announcements. A long-term change in Fed policy towards raising interest rates would lead to Eurodollar futures declining steadily over the long-term (making it a good trade for trend followers). 

Disclaimer: Past performance is not indicative of future results. Futures trading involves substantial risk of loss and may not be suitable for everyone. By no means is this newsletter/blog post offering any investment advice or suggesting to make any trade recommendations. Please consult an aiSource advisor prior to opening any managed futures accounts.


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Past performance is not necessarily indicative of future results. Trading commodity futures, options, and foreign exchange ("forex") involves substantial risk of loss and is not suitable for all investors. In no way is the advisor of the month a direct recommendation of aiSource or any of its affiliates. Please carefully review the disclosure documents and any other promotional material prior to investing with any program. Managed accounts and/or managed futures are very risky and may not be suitable for all investors. Please consult with a Managed Futures specialists prior to investing.