Why Eurodollar Option Strikes Above 100 Basis Points Can Exist

Summary

The note asks why CME Eurodollar interest-rate options include strikes above 100 basis points, which might appear to make puts always in the money and calls always out of the money if rates cannot fall below zero. The answer points out that this reasoning depends on a nonnegative-rate assumption. Futures prices and yields have moved into ranges associated with negative interest rates, so such strikes can still describe meaningful outcomes.

The examples cited are EuroSwiss futures trading above 100 and negative rates or yields in Swiss and German markets. They support the possibility of negative rates, while the answer characterizes that scenario as unlikely rather than impossible. The note does not explain the contract’s precise pricing convention or option payoff mechanics, so those details would need to be checked against CME specifications before applying the observation to a particular position.

Key ideas

• Strikes above 100 basis points can reflect scenarios involving negative interest rates.
• The assumption that rates cannot become negative makes some option strikes appear irrelevant.
• The cited examples show that negative rates and futures prices above 100 have occurred.
• The answer presents negative rates as possible but unlikely, not as a base-case forecast.

Tags

# Eurodollar Options Stike Price > 100 bps


# Eurodollar Options Stike Price > 100 bps












Looking at Eurodollar IR options market data coming down from CME, I can see a whole host of options where the strike is > 100 bps.

My understanding in this case is that puts will always be in the money and calls always out, so I was wondering why these may exist?

Any thoughts or facts of the subject would be appreciated.

## Answer by Anatoliy (score 3)

https://quant.stackexchange.com/a/3093

You assume that interest rates are never negative, however, all kinds of strange things happened already in the recent years, e.g. the Euroswiss futures traded above 100 in August 2011, SARON is negative (http://www.six-swiss-exchange.com/indices/swiss_reference_rates/reference_rates_en.html), German short term debt (Schatz) traded with negative yields this winter (http://www.bloomberg.com/quote/GDBR1:IND/chart/).

My understanding is that it's an unlikely situation, yet possible.

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