says “Eurodollar futures…settle in cash, and the minimum price change is one “tick,” which is a price change of 0.0001=0.01%, representing $25 per $1 million contract.” How can 0.01% of $1m be $25?! In fact, a few pages before this quote, Schweser says “The exchange also sets the minimum price fluctuation (which is called the tick size). For example, the basic price movement, or tick, for a 5,000-bushel grain contract is a quarter of a point (1 point = $0.01) per bushel).” So…does this mean that Schweser meant to say in the first quote that “Eurodollar futures…settle in cash, and the minimum price change is one “tick,” which is a price change of <>, representing $25 per $1 million contract.” (I wish I could bold it or highlight it but as I cannot, please see the << >> above for insertion)
Haha I noticed that too!
Don’t get too excited boys! You’re not unannualizing the discount. A price change of 0.01 is actually a change of 0.01/4 for a 90-day T-bill quoted at an annualized discount.
i always forget that too.
Aahhhhhh… Great satisfaction in knowing that I’m a silly dumbass rather than a stupid dumbass. Thanks a lot!!
I think the CFAI book shows the actual calc of how they get the $25 in there little footnotes on the bottom of page 67 in the Derv book. Good catch though! I’m having trouble remembering the when is the interest an add on or discounting and who gains and loses based on the underlying movement. Only one i seem to remember is the FRA but the rest I just cant remember. AHHH
@njlevel10610, just remember: 1) long=buyer, short=seller -as simple as this, you’ll be able to draw out (literally) who’s in what situation thus who gains/loses! 2) T-bill=discounting, Eurodollar futures=interest add on -For simplicity, remember it as “t-bill” belonging to the gov’t and b/c the gov’t is always so nice and wanting to provide citizens with a better life, they DISCOUNT their quote. 
So, for a long position in eurodollar future, if the reference rate rises, the long loses, because of the bond falling in value and the loss is equal to $25 for every 1 bp increase? Safe to assume the opposite for the short? For T-bill, is it the same concept? You buy or go long to tbill @ the discount price and settle at PAR? For FRA, the long is obligated to take/borrow a loan based on the fixed rate and if interest rates rise, they can potentially lend @ the reference rate and would have a gain on the position Short obligated to lend @ the at the fixed rate and when libor/reference rate fall, they can potentially borrow at the lower rate, and the difference would be gain. Is that correct?
If you remember how FRA works as you claim to, then you understand futures too, as they are both essentially the same derivatives except that futures is exchange-traded and standardized whereas forwards are private and customizable. The way futures works is quite simple, again, if you can draw out the situation. Long (buyer) agrees to buy a certain asset (whether it be currencies, debt or commodities) at the specified price (let’s call it X) at a specified time in the future. At settlement, if the price of the asset is above X, long gains because he could buy the asset at a lower price than the market. In contrast, the short loses in the same amount because short has to pay the difference between market price and X (if it’s cash settlement) or deliver the asset by buying the asset in the market at market price, then receiving the price of X, thereby losing out on the difference between market price and X. For eurodollar futures, this specified price is laid out in percentage, that is, interest rate, and the market price is a reference rate such as LIBOR. So, using the same illustration as above, if at settlement, LIBOR rises abovethe specified rate of X, then long gains because long is contracted to pay only X for the asset which is lower than LIBOR, the market rate. Now, with the fundamentals laid out, we can describe the specificity of how much the winner pays the loser and quotation of different futures, which I will do in parts below: 1) gain/loss: For eurodollar futures where the reference rate, LIBOR, is given for a period (ie. 90-day LIBOR), you must unannualize the rates (as beatthecfa said above), so with that in consideration, the gain/loss is: (LIBOR%-X%)*(90/360)*$1m