How Eurodollar Futures Differ from Zero-Coupon Bonds

# Difference between ED futures and ZCB


# Difference between ED futures and ZCB












I am new to rates and learning the basic products. It seems to me that Eurodollar contracts are similar to zero coupon bonds except that it locks in the interest. So I want to clarify if I am misunderstanding how this works.

My understanding is:

When we buy a ED future, we are effectively lending 1mm. So at Day1, we are giving the cp or clearing house 1mm; and on the maturity date we receive the 1mm+the agreed-upon interest.

A zero coupon with 3 month maturity will effectively be the same except for the fixed interest rate part.

So my question is: why do we have two different products that achieve almost the same effect? Are ED futures settled differently (i.e. no notionals are exchanged like swaps)? What exactly are exchanged between the involved parties in a Eurodollar future, and how is it actually a “futures contract”?

## Answer by Attack68 (score 5, accepted)

https://quant.stackexchange.com/a/38339

In general futures contracts are leverage instruments. They never require the investment of principal. They do however require margin: you need to fund your account at a futures exchange so that they have insurance against any losses you incur, as an example this might be 2 days standard volatility. On 1 ED contract for 5bps a day thats probably 10bps margin = 250 USD margin. Margin requirements are updated daily dependent on mark-to-market so if the position moves against you the first day by 5bp you will have to pay 125USD to the exchange to stay 250USD clear, on the other hand if the position moves favourably you could withdraw 125USD. You can close positions whenever the exchange is open.

When you buy a ED future you are speculating that the 3M LIBOR rate for the contract settlement date is lower than currently forecast. I.e. you hope the price of the ED contract will rise. If the contract never moves over its life and expires at the same price you bought it you will accrue no gain or loss (except the loss of interest on the 250USD margin you posted to the exchange).

A zero-coupon bond is completely different. This is a security product and essentially a loan to a counterparty with promise of interest and potential capital loss based on the creditworthiness of the CP. You cannot close the trade (except with agreement of the CP)

Also note that a ED contract has specific dates, e.g the Dec 18 IMM contract settles to 3M LIBOR published on the Monday before the 3rd Wednesday in December 2018 (the IMM date) whereas forward settled bonds (ignoring for a second the rareity of zero-coupon bonds) are very rare, you would not expect to trade today an agreement where you lent 1mm USD on the third wednesday of Dec 2018 for 3M tenor.