The eurodollar market dates back to the Cold War era of the 1950s, when the Soviet Union began offshoring its dollar-denominated revenues (from the sale of commodities like crude oil) from U.S. banks. This was done to prevent the United States from freezing its assets. Since then, Eurodollars have become one of the largest short-term money markets in the world and their interest rates have become a measure of corporate financing. Here is my understanding of both instruments. Please let me know if I have the right distinction. I know there are other differences. In short, with FRA, you have the obligation to borrow at a certain interest rate in the future. (Profit for long position if the interest rate rises) With Eurodollar futures, you are required to lend at a certain interest rate in the future. (Profit for long position if the interest rate falls). FRA – A futures contract – If you are with a long FRA, you have the right to borrow at a certain interest rate in the future.
Therefore, if the interest rate increases in the future, you have blocked your loan at a lower interest rate and you will therefore earn if the interest rate rises. The gain is paid in cash and you will receive money if the interest rate increases. Of course, the money will continue to be paid out in the future. Eurodollar-Futures – futures contract – If you walk with a long Eurodollar contract, you agree to get a particular interest rate. (This is exactly the opposite of fra – with FRA, you will in the future be tied to loans at a certain interest rate). With Eurodollar futures, you therefore make money if rates go down because you have committed to getting a certain interest rate. (This is the exact opposite of FRA where you make money when the interest rate rises). Eurodollar futures prices are expressed numerically at 100 minus the US 3-month LIBOR rate. Thus, a eurodollar futures price of USD 96.00 reflects an implicit settlement rate of 4%, or 100 minus 96. The price is reversed in relation to the yield. Eurodollars has become one of the main contracts offered to CME in terms of average daily volume and open interest (the total number of open contracts). Futures often exceed E-Mini S&P 500 futures (an electronically traded futures contract that is one-fifth the size of the S&P 500 standard futures), crude oil futures, and 10-year futures contracts with cash futures in terms of average daily volumes and open interest.
Convexity distortions occur on short-term interest rate instruments due to payment spreads in the futures market compared to the OTC-FRA market (also known as the futures market). Source: STIR Futures – Euribor and Eurodollar Futures Trading, by Stephen Aikin Yes. Being long is a FRA like being short of a fixed coupon loan. If I remember correctly (and someone steps in and corrects me if I`m wrong), but being a Eurodollar contract is comparable to a zero-discount loan. So slightly different structures. They correctly describe the impact of interest rates on each. This module demonstrates the close link between the FRA and Eurodollar futures markets. These contracts allow a company to replace variable rates with fixed rates or vice versa. FRAs are tailor-made contracts that can be obtained through investment banks. These banks protect the risk of these products by using Eurodollar futures.
To cover the sale of a futures contract, it is necessary to take into account the marking-to-market characteristic of futures contracts. As a result, FRA pricing is very competitive and monetary-letter margins are very narrow, as arbitrage possibilities place prices very closely in both markets. Suppose that at Sept. 1, the price of the Eurodollar December futures contract was exactly $96.00, which implies an interest rate of 4.0%, and at the expiration of December, the final closing price will be $95.00, reflecting a higher interest rate of 5.0%. If the company had sold eight Eurodollar contracts for December at $US 96.00 in September, it would have received 100 basis points (US$100 x US$25 = US$2500) for eight contracts, or $20,000 ($2,500 x $8). . . .