Why Eurodollar Futures Have a $25 DV01
Summary
The discussion explains the contract convention behind the $25 DV01 of a Eurodollar futures contract. The contract quote is 100 minus annualized three-month LIBOR, so a one-basis-point rate move corresponds to a small change in the quoted price. The contract’s reference exposure is framed as roughly one million dollars over a quarter-year accrual period; the precise equivalent varies with the period’s day count. The stated DV01 follows from the exchange’s contract design and cash settlement convention.
The answers clarify why entering partway through the three-month interval does not reduce this sensitivity: a listed futures contract begins its reference period after expiration and represents the full subsequent three-month term. A hypothetical instrument entered after accrual began would have a shrinking sensitivity, but this contract is not structured that way. The explanation is specific to the historical Eurodollar contract and its LIBOR-based quotation, so its conventions should not be generalized to other rate futures.
Key ideas
- Eurodollar futures are quoted as 100 minus annualized three-month LIBOR.
- A one-basis-point move in the reference rate corresponds to a $25 change in contract value under the stated convention.
- The approximate notional relationship reflects a three-month accrual, while the exact equivalent depends on day count.
- The futures reference period begins after contract expiration, so the position does not start partway through its underlying term.
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# Dv01 of Eurodollar futures contract
# Dv01 of Eurodollar futures contract
Can anybody please explain in layman terms why the DV01 of a eurodollar futures contract is 25? I can mathematically calculate in different ways, but not able to convince myself, especially how is it still $25 if somebody is buying a contract in the middle of the 3-month period. Thanks.
## Answer by Jacob M. Morley (score 11)
https://quant.stackexchange.com/a/10945
ED contracts are quoted as: $100-LIBOR_{3M}$, where the three-month LIBOR rate is annualized.
For instance, an annualized rate of 3.00% would yield a quote of 97. A one basis point change would now yield a quote of 96.99 or 97.01, resulting in a loss or gain in \$25.
By construction, the DV01 is \$25, which effectively results in the fact that the underlying reference is roughly \$1,000,000 since each contract is for 1/4 of the year and $\$10^6 \times \frac{90}{360} \times 0.0001 = \$25$ (although the precise amount varies with the days in the period). Really, depending upon the interval day count, it is possible to have notional values from \$1.046M to \$0.947M.
So really the answer to your question is because the CME defines the contract that way.
## Answer by RaveTheTadpole (score 4)
https://quant.stackexchange.com/a/10953
Jacob nailed it, but I'll add something else that might have been confusing you.
You can never buy eurodollar futures part way through the 3-month period. They always have 3 month of life to them, starting just after the expiration of the futures contract. So they will always be paying/receiving 3 months worth of interest. And therefore Jacob's math applies.
If you could enter into eurodollar futures after the start of the term, then the DV01 would diminish over time, as you expected. But that product doesn't exist as a futures contract.
Jacob's math is made simpler and more accurate because eurodollar futures are cash settled, so there isn't really a term at all. It's just a formula that the CME asserted, which vaguely replicates a 3 month loan/deposit.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.