2.2.1.1. Speculating and Hedging with Eurodollar Futures
Speculators may use Eurodollar futures to bet on the direction of interest rates. Because the spot price of Eurodollars, IMM Index, is equal to 100 – R, where R is the 90-day LIBOR rate, the price of Eurodollars and interest rates are inversely related. As interest rates go up, the price of Eurodollars goes down. As interest rates go down, the price of Eurodollars goes up.
The speculator will enter a short Eurodollars futures position if he expects the IMM Index (Eurodollars quote) to go down, and interest rates to rise. He will enter a long position if he expects the IMM index to go up (Eurodollars quote), and the interest rates to go down.
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Eurodollar Futures Speculating Strategies |
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Position |
IMM Expectation |
Interest Rate Expectation |
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Short |
IMM Index to go down Example: 98.65 to 98.35 |
Interest rates go up Example: 1.35% to 1.65% |
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Long |
IMM Index to go up Example. 98.65 to 99.15 |
Interest rates go down Example: 1.35% to 0.85% |
Hedgers use futures contracts to protect their financial positions against fluctuating interest rates. In fact, Eurodollar futures are particularly effective at hedging interest rate exposure. A company may need to borrow in the future, but fears that interest rates will rise. It would short a Eurodollars futures contract, which would allow it to lock in a futures price now to protect against falling Eurodollar prices and rising interest rates.
A Eurodollars futures contract is also useful when a company expects a large cash inflow three months from now and will want to invest the money in the future, or it wishes to lend money in the