I’m having a really hard time trying to understand this contract. From my understanding, it’s deliverable obligation is a 90 day t-bill which is somehow indexed to LIBOR? Can someone please help me understand this intrument. So: If you are long a Eurodollar contract what does that mean? How is it priced at initation? (Not looking for maths just a rough conceptual explanation) If you were hedging a floating LIBOR liability why would you do this by going long a Eurodollar futures contract?
Just know that it is similar to a forward rate agreement 1. Long a Eurodollar contract is equivalent to lending money. 2. It is determined by the market’s forecast of the 3-month USD LIBOR interest rate expected to prevail on the settlement date. 3. This will help to offset the liability of the LIBOR contract.
- Floating LIBOR Liability means that you are to pay LIBOR (floating) and receive Fixed. --> If LIBOR goes up (Eurodollar contract goes down), you lose money because you pay more. Thus, to hedge the position, I would say that you short the Eurodollar future contract. If what is stated below is correct, my analysis is right: The only part I am not sure of is: If LIBOR goes up Eurodollar contract goes down.
Any chance on getting a bit more of an explanation please? You said it’s like a FRA. FRA is simple enough. 2x4 FRA: you get the forecast of market rates in two months for two month loan. Then in two months time you discount the difference between actual and contract rate to PV. So how is this similar to a Eurodollar contract? When you are buying a contract, what exacly are you agreeing to? Similarly, when you short a contract, what’s your liability at expiration?
charly_blue Wrote: ------------------------------------------------------- > 3. Floating LIBOR Liability means that you are to > pay LIBOR (floating) and receive Fixed. > --> If LIBOR goes up (Eurodollar contract goes > down), you lose money because you pay more. > > Thus, to hedge the position, I would say that you > short the Eurodollar future contract. > > If what is stated below is correct, my analysis is > right: > The only part I am not sure of is: If LIBOR goes > up Eurodollar contract goes down. Sorry should have been more specific, you are long a floating rate bond indexed to LIBOR and need to hedge that.
- Then, being long a floating LIBOR bond is a having a floating LIBOR asset. (NOT liability) Correct?
Here’s the question: Reichmann, CFA, is a fixed income PM and it looking for methods of hedging interest rate risk in his fixed income portfolio. Reichmann would like to hedge the interest rate risk of one of his bonds, a floating rate bond (indexed to libor). O’Shea recommends taking a short position in a Eurodollar futures contract because the Eurodollar contract is a more effective hedging instrument than a Treasury bill futures contract. To hedge his long position in the floating rate bond should he: Take O’shea’s advice go long Eurodollar futures contract go long T-bill futures contract I am looking for an explanation of what a eurodollar contract actually is to help me understand this question. Thanks
eurodollar future is like short-term zero bond with future settlement. future settlement means you dont have to pay anything for it now (except margin of course) long futures interest rate risk is equal to int. risk of long zero bond. rates go down, future price goes up, you earn your original position: long floater, rates go down, you get smaller coupon therefore to hedge it you go long futures
pfcfaataf Wrote: ------------------------------------------------------- > eurodollar future is like short-term zero bond > with future settlement. > > future settlement means you dont have to pay > anything for it now (except margin of course) > > long futures interest rate risk is equal to int. > risk of long zero bond. > > rates go down, future price goes up, you earn > > your original position: long floater, rates go > down, you get smaller coupon > > therefore to hedge it you go long futures Thanks A LOT. Nice, simple, straight to the point explanation. Thanks