How Cash-Settled Eurodollar Futures Produce Gains and Losses

Summary

The document explains the settlement mechanics of short-term Eurodollar interest-rate futures through a bank’s hypothetical sale of several contracts. These contracts are cash settled, so expiry does not involve delivery of a time deposit. Instead, the final exchange settlement price, derived in the example from three-month US LIBOR, is compared with the trade price to determine the futures price change and the resulting gain or loss.

For a short position, a lower settlement price than the sale price creates a gain; a long position has the opposite result. The example translates the price movement into a cash amount by combining contract notional, the price change expressed as a rate, and the quarter-year accrual period. It illustrates the direction and basic scale of the payoff, rather than covering margin flows, daily marking to market, or contract specification details. The reference to LIBOR describes the contract context in the source and should not be taken as a general description of current benchmark conventions.

Key ideas

• Eurodollar futures are described as cash-settled contracts, with no deposit delivered at expiry.
• The settlement price is compared with the trade price to determine the futures payoff.
• A short position benefits from a price decline, while a long position has the opposite exposure.
• The example scales the price move by notional and the contract’s quarterly accrual period.

Tags

# eurodollar future


# eurodollar future












I just found out about eurdollar futures and I am confused.

A eurodollar future contract is defined as a cash settled future based on a Eurodollar Time Deposit having a principal value of USD $1,000,000 with a three-month maturity.

Suppose that a a bank decides to sell 5 eurodollar futures that settle in three months. What exactly does it mean ?

What is going to happen when the constract expires?

Same question if the bank decides to buy 5 eurodollar contracts.

## Answer by Attack68 (score 3, accepted)

https://quant.stackexchange.com/a/36749

all (STIR) short term interest rate futures are cash settled [see comment, STIR in this context is -IBOR futures which are the most common in the largest markets] If a party sells 5 contracts at a price of 98.50, and at settlement the EDSP (exchange delivery settlement price) (which is derived from 3M US LIBOR) is, say, 98.40 then the bank has made a profit of 10 cents or 10 basis points.

The overall profit is 5mm (notional) * 0.0010 (price chg) * 0.25 (quarter of year) = $1,250.

Rather obviously, buying is the opposite of selling, and would constitute a loss here.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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