Calculating in Eurodollars
Many traders confuse Eurodollars with the Forex currency pair Euro/Dollar. They may sound the same, but that is where the similarities end. A Eurodollar futures contract is written on a 3 month interest vehicle denominated in U.S. dollars but deposited in off-shore banks. In its simplest form it is a Certificate of Deposit located in a foreign bank. Accordingly, the interest rates offered to Eurodollar holders (in the cash market) are relatively low due to the perceived risk of default being minimal.
Together, the CME Eurodollar futures and options and lead the worldwide industry in open interest with over 40 million contracts held. The daily volume averages 3 million, making this the most liquid futures market in the world. A large majority of Eurodollar volume is executed electronically though the CME Globex platform allowing efficient and timely fills.
The contract size of a Euro dollar futures contract is $1,000,000, and similar to the other interest rate products contract expirations are quarterly; March, June, September, December. The point (handle) value of a Eurodollar is $2,500 and the tick value is $25. This contract has a minimum price movement of a half of a tick, or $12.50 for most months but is a quarter of a tick, $6.25 for the nearest expiring month. This is likely because the near month Eurodollar futures contract doesn't typically see much in the way of price change. The daily price change in the front month is typically less than 5 ticks, making it a great place for beginning speculators to get their feet wet. However, considered yourself warned, the deferred Eurodollar contracts will react more violently to changes in interest rates or climate. If your risk tolerance is low to moderate, stay with the near month.
Eurodollars are quoted in handles and decimals and are simply an inverse of the corresponding yield. For example, a Eurodollar price of 97.50 implies a yield of 2.5%. This is figured by subtracting the contract price from 100 (100 • • " 97.50). Clearly, yields can't go to zero, so we can infer that the Eurodollar will never trade at 100.00. Thus, as the futures price approaches 100.00, you should consider market technicals and fundamentals and perhaps construct a bearish strategy.
Calculating the profit, loss and risk of any given Eurodollar position is different that that of the Treasury complex but is also less cumbersome. Before you begin your calculation, you can simply move the decimal point and multiply each (full) tick by $25. For instance, if a trader buys a December Eurodollar futures contract at 97.085 (97.08 Â½) and later sells it at 97.290, the realized profit on the trade would have been 20.5 ticks or $512.50. The mechanics are the same as the other contracts; it is just the point value that differs (but don't forget to move the decimal two places to the right).
9729 - 9708.5 = 20.5
20.5 x $25 = $512.50