CME Eurdollar FAQ:
q1: When is the last trading day for Eurodollar?
a1: Eurodollar futures cease trading at 5:00 a.m. Chicago Time (11:00 a.m. London Time) on the second London bank business day immediately preceding the third Wednesday of the contract month; final settlement price is based on the British Bankers’ Association Interest Settlement Rate.
q2: When are new contracts listed?
a2: Following the expiration of a quarterly Eurodollar futures contract, a fortieth quarterly contract is available to trade the following business day. Since the vast majority of Eurodollar futures contracts expire on a Monday, the new contract is generally available on the Tuesday following a Monday expiration day.
The lag between expiration of the near month future and the listing of the fortieth Eurodollar contract results in a one-day delay in listing a new "Copper" (Year 10) pack after the expiration of the front quarterly future.
q3: How is the implied forward rate calculated?
a3: Eurodollar futures reflect market expectations of forward 3-month rates. An implied forward rate indicates approximately where short-term rates may be expected to be sometime in the future.
The following formula provides a guideline for calculating a 3-month rate, three months forward:
1 + 6mth spot rate x 182/360 = (1 + 3mth spot rate x 91/360) (1 + 3mth fwd rate x 91/360)
For example: 3-month LIBOR spot rate = 5.4400%
6-month LIBOR spot rate = 5.8763%
3-month forward rate = R
1 + .058763 x 182/360 = (1 +.0544 x 91/360)(1 + R x 91/360)
1.029708 = (1.013751)(1 + R x 91/360)
1.015740 = (1 + R x 91/360)
0.062270 or 6.227% = R = the implied forward rate
q4: What is the difference between "add-on interest" and "discount yield?"
a4: This concept describes the difference in the yields quoted for T-bill and Eurodollar contracts. T-bills are sold at a discount to face value and redeemed at par. The difference between par value and the T-bill’s price is the interest paid. Interest on ED deposits is "added on" to the principal loan amount.
An example of add-on interest with Eurodollars: You borrow $1 million for three months at 5.50%. The 5.50% of interest is "added on" to the $1 million principal amount. The interest due (assuming a 91-day loan) is equal to $1 million x .055 x 91/360 = $13,903.
An example of discount yield with T-bills: You sell $1 million face value of 91-day T-bills at an annual discount yield of 5.50%.
Discount = $1 million x 0.055 x 91/360 = $13,903
T-bill Price = $1 million -$13,903 = $986,097
Money Market Yield = $13,903/$986,097 x 360/91 = 5.578% (comparable to ED "add-on" rate)
q5: Where does the Eurodollar $25 "whole" tick come from?
a5: The Eurodollar tick reflects the dollar value of a 1/100 of one percent change in a $1 million, 90-day deposit. It is determined by this equation:
$1,000,000 notional x .0001 x 90/360 = $25
q6: What is the minimum price fluctuation (tick)?
a6: Trading can occur in .0025 increments ($6.25/contract) or "¼ tick" in the expiring front-month contract; in .005 increments ($12.50/contract) or "½ tick" in the four serial, and all forty quarterly expirations.
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q7 When does the "new" expiring front-month contract begin trading in "¼ ticks?"
a7 The "new" expiring front-month contract begins trading in ¼ ticks when GLOBEX opens at 5:00 PM, Chicago time on the Sunday before the Monday on which the "old" expiring contract ceases trading.
q8 How are price assignments determined for packs and bundles?
a8 The price of a bundle or pack is quoted in terms of the average net change from the previous day’s settlement prices for the entire group of contracts in the pack or bundle.
Bundles and packs are quoted in minimum .25 tick increments; however, whole-basis-point prices are assigned to the individual legs of the trade. Prices are assigned to reflect fractional combination prices beginning with the most deferred contracts, and working forward.
For example:
* If the 2-year bundle trades at + 2.25, the first six contracts are priced at a net change of +2, and the last two contracts at +3.
* If the 10-year bundle trades at - 5.75, the first ten contracts are priced at a net change of -5, and the last 30 contracts at -6.
* If the Purple Pack trades at +.5, the first two contracts are priced at steady (unchanged), and the second two contracts are priced at +1.
q9 How is the "lead" month in Eurodollars determined?
a9 The "lead" month is considered to be the contract with the highest daily volume, currently based on a 12-day moving average, calculated on every business day, beginning five weeks after the previous contract expiration.
