A Trader buys a Eurodollar futures contract, $1 million Face Value, at 98.14 and closes it out at a price of 98.27. On this contract the traader has A. lost $325 B. gained $325 C. lost $1300 D. gained $1300 - Dinesh S
B – (98.27-98.14)*25 = $325
- Eurodollar represents 25$ per 1 million contract per .01%. 2. Eurodollar futures are based on 90 day LIBOR which is an Add on yield - and price is calculated as (100 - annualized Libor in %). Price of Future rose -- so buyer has a gain = 13 \* 25 = 325. Choice b. CP
You guys are correct… ‘B’ is the correct answer but then why did I do it this way? 98.27% - 98.14% = 0.13% = 0.0013 0.0013*1m = +1300 (Ans D) Is this something that we have to remember - "Eurodollar represents 25 per 1 million $ contract per .01%."? how did $25 come into play? - Dinesh S
Dinesh…your methodology isn’t wrong…except for the fact that Eurodollar contracts are for 90 days, whereas interest rates are quoted annually, thus you would need to multiply $1,300 with 90/360 [98.27% - 98.14%]*90/360 * $1M = $325 As for the $25 thing…thats a neat short cut. 1 tick (1bp) = $25 suppose price of a contract (IMM index) goes from 96 to 96.01 (discount rate decreases from 4% to 3.99%). Prices changes by $1M * [1 - 0.04*90/360] = $990,000 to $1M * [1 - 0.0399*90/360] =$990,025
delhirocks Wrote: ------------------------------------------------------- > Dinesh…your methodology isn’t wrong…except for > the fact that Eurodollar contracts are for 90 > days, whereas interest rates are quoted annually, > thus you would need to multiply $1,300 with 90/360 You are correct… but in that case, we need to remember that the Eurodollar is a 90-day Eurodollar because nowhere in the problem there was a mention of a 90-day Eurodollar. - Dinesh S
A standard Euro dollar future contract traded at Chicago Merchantile exchange is based on 90 day LIBOR. (pg 95, CFAI)
It is one of the most liquid securities on Earth. A finance professional really ought not to have to “remember” Eurdollar contracts. The notional size of Eurodollar contracts traded everyday is well into the trillions of dollars… Edit1: Oh and check out the difference in volume between RTH CME and Globex. There is almost 20 times more volume on Globex. I’d say this is gettng to be an electronic contract not a CME contract. Edit2: That means that the daily notional volume in ED is on the same order as the capitalization of the NYSE. That’s volume vs capitalization.
Joey, do I also need to be aware of all the following (rigid??) contracts 1. T-bill Futures (Face Val = $1m) contracts are cash settled. 2. Eurodollar Futures (Face Val = $1m) are cash settles and are based on 90-day LIBOR and have annualized-LIBOR’s and of course the very famous $25 trick 3. T-Bonds (Face Val = $100K) are delivery settled and Delivery-Option is always with the short, so that they could look-up the multiplier and calculate the rear-delivery-settlement price (after the bond delivery choice is made). 4. Currency-Futures are Delivery Settled (then how are they different than what I learnt in Currency-Swaps??). I know for sure that Stock-Index Futures cannot be delivery settled (Or else I would love to order for an S&P-500 index to my shipping address :-)). Could you comment on their rigidity/flexibility? What if I was genuinely interested in a loan, 90-days from now? Schweser says that FRA’s are cash-settled. Would appreciate, if someone could throw some light on these futures contracts, Are these industry standards or Schweser made them all up. Since I am new to the industry & just trying to get my basics straight. - Dinesh S
dinesh.sundrani Wrote: ------------------------------------------------------- > Joey, do I also need to be aware of all the > following (rigid??) contracts > > 1. T-bill Futures (Face Val = $1m) contracts are > cash settled. Last I checked, T-bill futures were settled by physical delivery. Now according to the CME website they are cash-settled. It’s news to me. I guess they had to do something because nobody was trading them. Doesn’t seem to have worked. Nobody trades these. > 2. Eurodollar Futures (Face Val = $1m) are cash > settles and are based on 90-day LIBOR and have > annualized-LIBOR’s and of course the very famous > $25 trick I personally use the $2500 trick, but the $25 trick works every bit as well. > 3. T-Bonds (Face Val = $100K) are delivery settled > and Delivery-Option is always with the short, so > that they could look-up the multiplier and > calculate the rear-delivery-settlement price > (after the bond delivery choice is made). I think T-Bond cheapest to deliver and conversion factors is actually Level III stuff, right? Delivery options with T-bonds are beyond any of the CFA curriculum and they work hard to stay away from it at whatever level this comes up. > 4. Currency-Futures are Delivery Settled (then how > are they different than what I learnt in > Currency-Swaps??). > 1) Swap exchange takes place at origination, futures it takes place at end. 2) Swaps are not exchange traded hence have counterparty risk 3) Futures are marked to market with daily cash exchange, swaps rarely have any marking to market (though possible for credit reasons). 4) Swaps are usually longer term than future contracts. 5) Swaps involve periodic interest payments. 6) Taxes are way different. and a bunch of other stuff. They are very different derivatives. > I know for sure that Stock-Index Futures cannot be > delivery settled (Or else I would love to > order for an S&P-500 index to my shipping address > :-)). > Right - always have been cash-settled. > > Could you comment on their rigidity/flexibility? > What if I was genuinely interested in a loan, > 90-days from now? Schweser says that FRA’s are > cash-settled. > Your ability to get a loan and the rate on that loan depends on your creditworthiness. I would say that an option to take out a loan at a fixed rate is a credit line (almost certainly floating rate) combined with some interest rate derivative to fix the rate. > Would appreciate, if someone could throw some > light on these futures contracts, Are these > industry standards or Schweser made them all up. They are heavily traded standard financial instruments. Whaddya mean Schweser made them up? Go rent the ‘Trading Places’ DVD (very important in finance to know everything there is to know about Trading Places, Gordon Gekko, Caddyshack, and I’m sure we could come up with a nice list on AF). > Since I am new to the industry & just trying to > get my basics straight. > > - Dinesh S
Thanks Joey on the insider regarding the above Futures Contracts’, much appreciated… I’ll surely get a copy of ‘Trading Places’ and watch it in my leisure time (after exam). - Dinesh S
There are surely questions on Trading Places on the CFA exam. Didn’t you see those LOS’s?
Is it? Then how have I missed it? Any pointers to which LOS/ Reading/ SS exactly? - Dinesh S
Calm down. It was a joke. It’s a funny comedy movie that would make a nice study break.
hehe… you caught me off-guard. I seriously thought I missed something, with just 50 days left I already have complete Ethics and GIPS to go (from the SoPH-9th-Edi) - Dinesh S