Introduction to Trading Eurodollars

What is a Eurodollar?

A Eurodollar is a dollar denominated deposit held in a bank outside of the United States.

Being located outside the US, Eurodollars are not subject to regulation by the Federal Reserve Board. Being outside the jurisdiction of the Federal Reserve the deposits are subject to fewer regulations than withing the US, allowing for higher margins.

The name is derived from the fact that originally, these deposits were mostly held in Europe. Such deposits are held in many countries across the globe, but they are still referred to as Eurodollars.

The term Eurodollar also refers to the financial futures contract traded at the Chicago Mercantile Exchange. It is one of the most actively traded futures contracts in the world, making it a highly liquid market.

Trading the Eurodollar

1 Eurodollar gives you control over $1 million Eurodollars, and reflects the Libor rate for a 3 month, 1 million dollar deposit.

1 tick (0.005) is worth $12.50. Eurodollar expirations are in March, June, September and December. Pit trading hours are from 7:20AM through 2PM CST and Eurodollars can also be traded almost 24 hours continuously on Globex during weekdays.

The best time to trade Eurodollars is at times when events that influence interest rates are taking place, such as Fed meetings.

Eurodollar prices reflect U.S. short-term interest rates. Prices are quite responsive to Fed policy, inflation, and other economic indicators.

The price of a Eurodollar futures contract is equal to 100 minus the yield (interest rate) for the given future date. Thus, a price of 96 would imply a 4% yield on the Eurodollar deposit.

Interest rates falling will cause the Eurodollar to rise in price, and rising rates cause the Eurodollar to fall.