Will I ever be able to connect agreeing to loan, as similar to loaning.. I don't know haha.. Doesn't make sense.. The only thing that keeps the US out of a Japan situation is the fact that the entire world can't afford for the US to become Japan.. In my opinion.. But as they say... Don't bet against the end of the world because it only happens once.. haha
I get what your saying here.. "Convergence" isn't relevant... Present discount value of a future cash flow.... maybe like future present value of an investment... so If the future value implies a cash flow.. You discount that future value to in present value terms.. such that what your really earning is the realization of the differential... Your realizing the discount..
Think about it this way (somewhat simplified)... You and I get together and we agree that you will lend to me and I will borrow from you a sum of $1mil for 3 months at a rate of 0.25% per annum. The loan will be finalized and signed on the 17th of March 2014 with the money to be delivered on the 19th of March 2014. On the 17th of March we get together again and it turns out that the rate I am offered in the market on loans exactly like the one we agreed on (which is no longer in the future, but is happening right then and there) is 0.23% per annum. Obviously, I don't want to borrow at 0.25% from you, but I have made a promise. In order for you to release me from my promise, I will have to pay you the difference. In terms of actual money, this difference will be 0.02% applied to $1mil and also divided by 4 (since our rates are all per annum, whereas the loan was only for 3 months). If my arithmetic serves me, that's like $50 that I have to pay you. What I have described above is equivalent to you buying one lot of the H14 Eurodollar contract at 99.75 (100 - 0.25), waiting until the contract matures at 99.77 and making 2 ticks. Instead of me, when trading Eurodollars your counterparty is the exchange.
I totally follow this.. We are trading a rate on a loan agreement.. no loan actually happens though.. no interest is realized, no carry, nothing.. just a change in the rate over time as dictated by the market which puts the position in the positive or negative...
Precisely. It's an imaginary future loan (or a "notional" one, to use your term) that never actually gets consummated. Instead, when the time comes (i.e. either the contract matures or you unwind your position), you and the exchange agree to tear up your contract for a fee. Once you frame it this way, you can actually think a lot more clearly about the whole idea of "risk premium", "rolldown" etc etc...
Now are you guys trading packs against stacks and the like... Or taking a lot of directional risk... I'm back to a little better understanding now.. For the moment haha
Touche! I doubt my own doubt... I don't kid myself... I know I'll need to revisit things like I do in so many other ways!
No there is no zero coupon, the price is already a projection of expiration, if the rate is 1% the price stay around 99,75 (a quarter) near expiration. I hope this will help