Excuse my STIR ignorance As eurodollars near expiration, they approach spot rates. I know there is some variability as to how fast they approach spot rates, but if news and investor sentiment remains the same, do they increase in price, as expiration nears, at the same rate as if you had actually invested $1,000,000 at the spot rate? My thinking... Buy a eurodollar fut on $500 margin and hold for one month. Collect equivalent 0.3%p.a. (what ever libor is) on $1MM.. which is $250. Close position. A $250 gain on a $500 margin is 50% gain in one month, what am I missing?
Two things affect the rollup: 1) What is priced-in, in terms of the FOMC 2) The expectations for the spread between LIBOR and the FedFunds rate. 3) Simple risk premium Based on the three considerations above, you have to treat each case on its own merits.
PIMCO uses monster CME eurodollar strips as a synthetic proxy in many of their funds. They have been doing it with great effect for close to 20 years now. As I recall several years ago, at one point in time they over 50K open interest in the ED futures.