Am I paying fixed or floating?
Fixed I believe
There is only one payment…
your taking a loan at a fixed rate. right?
I’m doubting my first answer now, I’m thinking its pay float.
fix
What??? At expiration of the futures contract, the long enters into a loan for one period. If the underlying is 90-day LIBOR, you borrow money for 90 days at the futures price at expiration. There aren’t multiple payments involved.
^^ agree. why is this being confused with swaps?
F*ck. You’re absolutely right, I’m mixing stuff up.
eurodollar are floating hedges for swaps as far as i recall…
wyantjs Wrote: ------------------------------------------------------- > What??? At expiration of the futures contract, > the long enters into a loan for one period. If > the underlying is 90-day LIBOR, you borrow money > for 90 days at the futures price at expiration. > There aren’t multiple payments involved. Nope - Eurodollar contracts are cash-settled. There is no loan, no discounting, no convexity.
buying an eurodollar futures ‘strip’ helps you hedge a floating liability. just one contract is not going to hedge anything more than 1 such liability
Right…it is actually not permitted. But the underlying priciple of the transaction is a one time payment based upon what would be a one time loan. Therefore, fixed vs. floating has nothing to do with it.
If I am Long a Eurodollar Future and LIBOR declines, I make money…right?
Yes.
okay now I’m confused again. Just to make sure. I buy a Eurodollar future, say 5%, I keep it for a year when Libor is at 4%. Does that mean I get paid 5%, pay 4% so net I will receive 1% of the notional?
If LIBOR is at 5%, the contract will trade at 95. If you hold the contract for a year and 3-month LIBOR is at 4%, you will have $2500/contract in your margin account. Originally you agreed to lend $1M 3-month money at an annual rate of 5%. You would get 0.05*1,000,000*(1/4) = $12,500 for this. When interest rates drop to 4%, you will only get 0.04*1,000,000*(1/4) = $10,000 for it. Fortunately you have $2500 in your margin account that makes up the difference. Edit: put agreed to lend in quotation marks. You are just locking in a lending rate.
The contract is priced at 100 minus Libor. So if you buy when libor is 5% you have just bought at 95. If underlying libor changes to 4% then the contract has gone up in value to 96. The calculation for the gain is done like any other future contract. Change in price * contract size * # of contracts.
I’m totally confused about this: isn’t Eurodollar futures long position lending out money in the future and receive fixed payment?
If you long a 1-yr future contract at 5% LIBOR, does this mean 1-yr later I get to lend at 5% to the party that sold the future?