Why Eurodollar Futures Settle at 100 Minus LIBOR

Summary

The document asks why an expiring Eurodollar futures contract is quoted and settled as 100 minus LIBOR rather than as the discounted present value of a three-month deposit. The reply frames settlement through convergence and market indifference: at expiry, borrowing at the relevant market rate or taking the futures position should lead to equivalent values, as with the relationship between a spot asset and its future.

This offers an intuition for the settlement convention and its connection to the rate represented by the contract. The exchange is brief and does not derive the contract’s mechanics, explain how the quote maps to a three-month interest amount, or address margining and rate-basis details. It also presents the explanation as a belief rather than a complete technical account, so the document is best read as a starting point for understanding expiry convergence rather than a full pricing treatment.

Key ideas

• Eurodollar futures use a price expressed as 100 minus the reference LIBOR rate.
• The question distinguishes that quote from discounting a deposit’s principal to present value.
• The reply explains settlement through equivalence between borrowing at the market rate and holding the expiring future.
• The answer gives intuition but no detailed contract or pricing derivation.

Tags

# Why are Eurodollar futures settled to 100 minus LIBOR? Is this actually connected to a Eurodollar deposit?


# Why are Eurodollar futures settled to 100 minus LIBOR? Is this actually connected to a Eurodollar deposit?












I'm confused as to why Eurodollar futures prices settle to $100-LIBOR$ at expiration. If at the time of settlement the futures contract was meant to represent a 1,000,000 Eurodollar deposit to mature 3 months in the future, then wouldn't we discount the 1,000,000 back to today to get the settlement price. This would mean the futures contract would settle to $\frac{1,000,000}{1 + LIBOR/4}$. Where does $100-LIBOR$ come from? Is this just a convention for how to settle the contracts, meaning Eurodollar futures have nothing to do with any underlying Eurodollar deposit?

## Answer by rip (score 0)

https://quant.stackexchange.com/a/81354

I believe the settlement mechanism should be such that you can either borrow in the market (i.e. at LIBOR at least theoretically) or you can buy the expiring Eurodollar future. Just like in the equity market, on the future expiry you should be indifferent in valuing the stock and the stock future

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