2.2.1. Eurodollar Futures
Eurodollars are U.S. dollar deposits held in banks located outside the boundaries of the United States. They differ from dollars deposited inside the United States in one respect only. They are not subject to U.S. banking regulations. Because they have lower reserve requirements and are charged lower tax rates, dollars held in foreign banks or foreign branches of U.S. banks earn higher interest rates and can be lent at lower interest rates.
The Eurodollar market began in Europe after World War II. Today corporations, money market funds, and foreign central banks actively lend in the Eurodollar market. Its popularity has extended the market to other continents and other currencies. Eurodollar futures today are the most actively traded of the short-term interest rate futures. Their success triggered the eventual demise of the T-bill futures contract, which no longer trades on any exchange.
The underlying asset of a Eurodollar futures contract is a three-month Eurodollar time deposit. Eurodollar futures trade in the U.S. on the International Monetary Market (IMM), which is a division of the Chicago Mercantile Exchange (CME). The contract size is $1 million, and contracts mature in March, June, September, and December. The tick value is one half of one interest rate basis point (.005 price points = $12.50) for all but the nearest contract. The tick value for the nearest contract is one quarter of one interest rate basis point (.0025 price points = $6.25). The contracts are set up so that every change of one basis point in the price of a Eurodollar futures contract is worth $25.
The net carrying cost of a Eurodollar futures contract is the difference between the cost of financing a futures contract and the interest earned on the underlying asset. As a result, net carrying costs may be either positive or negative. A positive carrying cost means that the interest earned is greater than the financing cost, and the futures