Why Rolling Eurodollar Shorts Differ from Shorting a Deferred Contract

Summary

The document explains why repeatedly rolling a short Eurodollar futures position is not equivalent to opening a short in a later-dated contract. It contrasts these contracts with gold futures: successive gold contracts can represent exposure to delivery of the same underlying commodity, making a rolled short conceptually similar to maintaining exposure to that gold. Eurodollar futures instead settle in cash against the three-month LIBOR fixing associated with each contract’s own date.

Because a front contract and a deferred contract reference different future rate settings, their prices can respond differently and may even move in opposite directions. Thus, rolling a short position changes which rate-setting exposure is held over time, while shorting a single deferred contract targets one particular fixing. The explanation is conceptual and does not provide a pricing model, empirical comparison, or guidance on roll timing; it also describes Eurodollar contracts and LIBOR conventions rather than updating them for later benchmark-market changes.

Key ideas

• Rolling a short Eurodollar contract repeatedly creates exposure to successive rate settings.
• A deferred Eurodollar contract settles against the fixing associated with its own date.
• Contracts tied to different future fixings can move differently, including in opposite directions.
• The gold comparison illustrates why rolling can preserve a more consistent underlying exposure in some futures markets.

Tags

# Short Eurodollar futures front v back month


# Short Eurodollar futures front v back month












What is the difference between shorting the front month, rolling it into a back month vs just shorting the back month?

For example: shorting the front month and rolling the short every 3 months until Jun'23 versus shorting Jun'23

## Answer by kdragger (score 3, accepted)

https://quant.stackexchange.com/a/65936

The difference is that they are completely different things.

Let's start with gold futures. Gold futures, if held to delivery, delivery spot gold -- say 100oz gold bars out of NY. So if you sell front gold, roll to next, and so on, you effectively are short a future against the "same gold". Or you can think of it like that because being short Feb gold has the same deliverable as Jun gold.

Eurodollar futures don't work that way. March 2022 Eurodollar futures are cash settled at the March 2022 3 month LIBOR set. Dec 2022 Eurodollar futures are cash settled on the Dec 2022 3 month LIBOR set. These underlying assets could be moving in opposite directions (not typically, but at least possible).

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.