Eurodollar Futures, FRAs, and Interest Rate Swaps Compared

Summary

The explanation distinguishes Eurodollar futures from forward rate agreements and interest rate swaps. In this context, Eurodollar refers to futures on a three-month interest rate, though the term can also refer to the Euro–US dollar currency pair. Compared with an FRA, the futures contract is marked to market daily and cleared, reducing counterparty risk through the clearinghouse.

Neither instrument is itself an interest rate swap. A Eurodollar contract locks in a rate for a future three-month period, while a plain vanilla swap exchanges floating and fixed cash flows over a period. A strip of Eurodollar contracts can replicate the cash flows of such a swap. The document gives a concise conceptual comparison but does not discuss contract conventions, pricing adjustments, or current-market replacements for Eurodollar contracts.

Key ideas

• Eurodollar can refer to interest rate futures or, in another context, the Euro–US dollar currency pair.
• Eurodollar futures are marked to market daily, unlike forward rate agreements.
• Clearing futures reduces counterparty risk through the clearinghouse.
• A Eurodollar contract covers a future three-month rate period, while a swap exchanges fixed and floating cash flows over time.
• A sequence of Eurodollar contracts can replicate the cash flows of a plain vanilla swap.

Tags

# EuroDollar vs FRA


# EuroDollar vs FRA












I am not quite clear about this.

- When people mention Eurodollar are they mean Eurodollar Futures?

- One of the difference between Eurodollar and Forward Rate Agreement(FRA) is basically difference between futures and forward, which means daily settlement for futures. Is there anything else?

- If Eurodollar and FRA are both used to lock interest rate, are these same as Interest Rate Swap?

Thanks

## Answer by RRG (score 8, accepted)

https://quant.stackexchange.com/a/9708

- Yes. Although sometimes people mean the Euro/Dollar currency pair which can cause confusion.

- Besides the daily mark-to-market, the counter-party risk is also removed through the clearing house for the futures.

- No. Eurodollar and FRA are not the same as swaps. A Eurodollar fixes an interest rate for a three month period in the future whereas a swap represents the different cash flows between floating and fixed rates during a period. However, the cash flow of a plain vanilla swap can be replicated with a sequence (strip) of Eurodollar contracts.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.