![]() ![]() This means they bear higher risk, thus have higher yield. Eurodollar futures contracts are time deposits that are stored in banks outside the US, but denominated in US dollars. However, the truth is that they are something completely different. Forex is the biggest market in the world and said currency pair is the most actively traded one. There are very few people who hear the term “Eurodollar futures” and don’t immediately think it’s a futures contract that helps you take advantage of the EUR/USD. We will also take a close look at the advantages and disadvantаges of the instrument to understand how the Eurodollar futures contract works in practice. Everything from what they are, through their history, contract specifications and symbol, to what to look for when navigating the Eurodollar market. The following guide will explore the topic of Eurodollar futures. In reality, it has nothing to do with the FX market. To check out additional interest rate data, visit the Federal Reserve Board Statistical Releases listed below as references.When you hear Eurodollar futures, you might think it’s about the EUR/USD Forex currency pair. As noted in Instruments of the Money Market, in the competitive money markets, “Arbitrage keeps interest rates closely aligned between Eurodollar deposits and deposits with roughly comparable characteristics at banks located in the United States.” secondary market certificate of deposit (CD) rate shown in red.Īs you can see, the rates are nearly identical, rarely varying by more than several basis points over 15 years of weekly data. dollars) shown in blue and the 3-month U.S. You can see this in the following chart it shows the very close relationship between a 3-month LIBOR interest rate (denominated in U.S. and Eurodollar interest rates of a similar maturity. In fact, in today’s global financial markets, there is a strong correlation between short-term U.S. Mishkin and Eakins explain in Financial Markets and Institutions, (2000) that because overnight LIBOR and overnight federal funds interest rates tend to be “near-perfect substitutes” the interest rates in these two markets tend to track each other very closely. ![]() banks with an alternative to short-term borrowing in the domestic overnight federal funds market. An active secondary market allows investors to sell Eurodollar CDs before the deposits mature.Įurodollars provide large U.S. LIBOR is the rate at which major international banks are willing to offer term Eurodollar deposits to each other. LIBOR is defined in Chapter 5 of Instruments of the Money Market: However, consumers may be familiar with the term LIBOR because LIBOR interest rates are commonly used as an index to determine interest rates on adjustable rate mortgages and business loans in the United States. The term “interbank” refers to the fact that this is a market for banks and financial institutions, rather than individuals or nonfinancial businesses. ![]() LIBOR refers to the London Interbank Offered Rate, a money market interest rate that has become a standard in the interbank Eurodollar market. For the most part, banks offering Eurodollar deposits are located outside the United States.Įurodollars originated in London during the Cold War but are now held at banks around the world, and today they constitute one of the largest short-term money markets in the world. Chapter 5 (on Eurodollars) provides the definition for these deposits:Įurodollars are bank deposit liabilities denominated in U.S. A good place to start is the Federal Reserve Bank of Richmond online publication, Instruments of the Money Market. Good question! To provide the answer, we’ll need to travel overseas to check out the international money markets.īefore discussing LIBOR, you should know about Eurodollars. ![]()
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