Difficulties pricing eurodollar futures

This is one of the Los for derivatives. I have read schweser and curriculum but still don’t understand it. Can someone help?

I don’t have it in front of me, but the basis for any futures contract is what you would have gotten paid on one side of the swap versus what you did get paid. For stock futures you’ll have to deduct dividends, and for bonds you’ll have to deduct coupons. Don’t get bogged down in the formulas to start. If you can understand the basic principles it makes everything else make much more sense.

I think it has something to do with Eurodollar instruments being add on instruments while t bills are discount instruments…I understand this, but then why does this feature for Eurodollar futures making pricing difficult?

Swaps and futures are two different things. Did you make a typo?

Anyone else understand this? Thanks

I believe Schweser doesn’t really explain whats the big deal with this one, I haven’t looked at curriculum yet… The main point is that eurodollar futures are unique. The contract is designed such that one of the most important and common features of all futures contracts is missing: the convergence of the futures price to the price of the underlying spot market instrument (which is critical to the pricing of a futures contract, not to mention using them as hedging instruments). Instead of convergence of the futures to the underlying, a 90-day Eurodollar time deposit, its price converges to 100 minus the rate on a 90-day Eurodollar time deposit. I hope it helps.

Eurodollar futures are priced as 100 minus the 90 day interest rate on dollar denominated deposits in non US banks (LIBOR). F = 100 - R Where R = 90 Day LIBOR, annualized to 360 days. The main difference between Eurodollar futures and Eurodollar time deposits is that Eurodollar time deposits are add-on instruments. Direct comparison can not be made between Eurodollar futures and Eurodollar time deposits whereas a comparison between US T-Bill futures and Eurodollar futures can be made. 1 bps change in the interest in Eurodollar Future contract of 1 million will result in a change of 25 1,000,000 x (1 - 5% x 90/360) = 987500 1,000,000 x (1 - 5.01% x 90/360) = 987475 987500 - 987475 = 25 On the other hand with Eurodollar time deposits if $1m is deposited for 90 days then PV on 10% interest rate is 1,000,000 / (1+10%)^(90/360) = 976454.09 1,000,000/(1+10.1%)^(90/360) = 976431.84 976454.09 - 976431.84 = 22.19 It is clear that 1 bps change in Eurodollar Futures is of $25 whereas in Eurodollar Time deposits it is $22.19 Schweser does not really explain all this. Curriculum does but you see reading and retaining the whole picture without disconnects in curriculum is quite a difficult job as there is so much to read. I was able to get Curriculum Notes of FinQuiz and found them very productive as they are structured following the flow of the curriculum. They really helped out in making the picture clear in my mind and linking the disconnects.