What drives Eurodollar prices?

Discussion in 'Financial Futures' started by stevenpaul, Nov 15, 2018.

  1. Eurodollar futures settle at 100 - the 3 month USD Libor, if I understand correctly. Are the prices of each contract in the term structure simply the market's forecast of 3m Libor at the date of each contract's expiry?

    If GE Dec 20 is trading at 96.75, doesn't that mean the market is forecasting a 3m Libor of 3.25 on Dec. 14, 2020?

    If I'm right so far, are there any other factors besides the outlook on Libor at a future date that influences GE prices?

    I notice the prices go down consistently as one looks farther out in time. Dec 18 is at 97.26 while Dec 23 is at 96.79 (resembling bond prices along that curve). Is this only because the market thinks Libor will go up over the next several years?

    I'd also like to know what drives the 3 month USD Libor itself, besides the Fed rate, but I suppose that's another thread....
  2. generally buying and selling drives price movement. yes it's that simple, forget all that fundamental gibberish. everything known and all reasoning about a market is reflected in it's current price.
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  3. tiddlywinks


    bone likes this.
  4. I take your point, but on what basis are traders buying or selling? Is it only technical (trend, mean-reversion, etc.), or does the GE move because of views on the LIBOR at the time of future expiry, or for other fundamental reasons? I'm really curious what, besides technicals, drives this market.
    Last edited: Nov 15, 2018
  5. ok so you got me to thinking - i am positive that snail of a market has something pushing it. it would be interesting to find a non-fundamental reason it moves. i would start with the libor and go from there and expand my search.
  6. Visaria


    GE is used primarily by financial institutions to hedge themselves on interest rate risks.
  7. That snail is on steroids. Surprisingly volatile market where it's easy to make or lose big, in my experience--like any market. I'm intrigued by it because the terms in the strip are highly correlated but move by different magnitudes. Back months tend to move a bit more than front ones. Structures like (option) calendar spreads are interesting because they are theta long but the beta of the back month is greater than that of the front, making them act as if long of gamma.

    Also incredibly liquid. No problem getting filled, and tight bid/ask spreads going out several years in the strip. Theta is a good deal on those high beta far-out underlyings. I think this is an underappreciated market, but I want to understand the fundamental drivers.

    I don't know that it matters, but there are forecasts for LIBOR going out several years and the values are quite different from those implied by the GE futures of the same dates.


    LIBOR values here differ by more than a percent from those implied by the GE futures in 2020. I wonder where these values come from and how easy it is to predict LIBOR. Isn't it based primarily on the Fed rate? What is the correlation between Fed fund futures and the Eurodollar, and does the former lead the latter?
  8. tiddlywinks


    @stevenpaul :

    You seem to be intelligent, and I mean no disrespect here.
    I am not an "expert" or "guru" on GE in any stretch, and definitely not regarding options pricing, BUT I do know enough to be more than minimally versed. A look at wikipedia(no less) answers several of your questions, as well as completing the incomplete and thereby inaccurate answers you've received.


    Eurodollars are time deposits denominated in U.S. dollars at banks outside the United States,

    Eurodollar futures are a way for companies and banks to lock in an interest rate today, for money it intends to borrow or lend in the future.

    CME Eurodollar futures prices are determined by the market’s forecast of the 3-month USD LIBOR interest rate expected to prevail on the settlement date. A price of 95.00 implies an interest rate of 100.00 - 95.00, or 5%. The settlement price of a contract is defined to be 100.00 minus the official British Bankers' Association fixing of 3-month LIBOR on the day the contract is settled.

    Wikipedia! who'da thunk it? https://en.wikipedia.org/wiki/Eurodollar

    Sprout likes this.
  9. bone

    bone ET Sponsor

    Eurodollars (generally speaking) serve two proxy purposes; neither of which is a perfect fit but it's the closest thing available for liquid, low cost transactions markets - they are a proxy for bank short-term funding costs, and they can be a loose proxy for corporate borrowing in the sense that nearly all commercial lines of credit stipulate LIBOR plus Basis Points (the vig). There are OTC Swaps that are better proxy fits, but likewise they incur a rather steep slippage cost. It's important to note that there is a very large dispersion in bank borrowing costs not reflected by LIBOR - one such factor would be the performance of a particular bank to Central Bank stress testing.

    The traded and open interest in the Eurodollar futures is huge. Look at the forward curve (later dated expiries) settlement OI and Volume:


    Note that 4,375,868 contracts were traded today. Note that the first six (prompt) expiries only accounted for 86,825 contracts.

    Looking at the Settlements Sheet - envision all those various expiry (date) settlement prices as data points. Plot those data points and you have a Forward Curve. As credit cost expectations increase and decrease for various future times (due to a number of reasons), that forward curve is a very dynamic changing entity. Hedgers and Speculators use Spread Trading Strategies to capture current pricing dislocations, anticipate future forward curve movement, or to lock in rate structures.

    There has been a great deal of regulatory and market participant talk about replacing LIBOR as quoted by banks due to bank manipulation of Libor submissions. To date there is no clear replacement that has the liquidity and costing advantages of the Eurodollar Futures.

    Here is a link to the CME's Educational Materials. This is very high quality information and it's free:


    Some of the biggest speculators you'll meet in Chicago are big swinging dick Eurodollar Spread Traders - both futures and options. It's not a glamorous or sexy market - but it quite literally is the lifeblood of the CME.
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  10. tiddlywinks


    Excellent post!

    Thank you @bone.
    #10     Nov 16, 2018
    bone likes this.