Eurodollar Futures, LIBOR, and the Oft-Obscured Consistency of Present vs Future Risks

by Jeffrey P. Snider
Alhambra Partners

A eurodollar futures contract affords the buyer the opportunity to obtain a $1 million eurodollar deposit for a three-month term at the expiration and execution of the contract. The rate to be paid for that deposit is 100 points minus 3-month LIBOR for spot settlement on the 3rd Wednesday of the contract month. If 3-month LIBOR on June 20, 2018 is, for the sake of argument, 1%, then the June 2018 contract itself will price 99.00 at that expiration. You are essentially buying into a discounted view of future money rates.

Because we are dealing with prices and views on rates into the future, there are different perhaps seemingly conflicted sets of risks and parameters. This is especially true when examining the current offerings in LIBOR.

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