Eurodollar Futures

Contributor, Benzinga

If you want to start trading futures or switch brokers, visit NinjaTrader.

Eurodollar futures have always been an important interest rate and credit risk benchmark. Investors will watch them in an even more vigorous way in today’s highly volatile COVID economy. Although the average investor may not know much about it, eurodollar futures contract prices serve professional investors as an important indicator of interest rates and credit demand. As such, they can be quite helpful when trying to determine the direction of future economic activity.

Surprisingly, the term “eurodollar” applies to any currency that is not held within its borders, not just U.S. dollars held in Europe. In other words, eurodollars are U.S. dollars held in foreign banks. Adding the euro- prefix to the currency of interest is also an acceptable form — Japanese yen held in China can be called euroyen.

What Are Eurodollar Futures?

The phrase “euro/dollar” (which sounds exactly like “eurodollar”) refers to the EUR/USD currency pair, while “eurodollar” refers to U.S. dollars held outside the U.S. It is actually meant to denote a U.S. dollar-denominated time deposit held offshore from the U.S.

The eurodollar is one of many different types of futures. The price of a eurodollar futures contract is calculated according to the equation below:

Contract International Monetary Market (IMM) Index = 100 – LIBOR

For instance, if a eurodollar futures contract is trading at $97.00, the implied 3 month LIBOR settlement rate is 3% on a $1 million offshore deposit. Price and yield have an inverse relationship. 

The eurodollar futures contract is one of the most popular electronically traded futures on the Chicago Mercantile Exchange (CME). The open interest and day-to-day volume of eurodollar futures contracts often surpasses crude oil, Treasury notes and E mini S&P 500 futures contracts. It also has the distinction of being one of the first cash settled futures contracts since its introduction in 1981.

Hedges can be put in place using eurodollar futures either against rising or falling interest rates. Corporate borrowers generally look to protect against rising rates, while lenders look to protect against falling rates. Retail traders can use eurodollar futures to employ trading methods such as contract spreading. Eurodollar futures normally exhibit low daily volatility, high liquidity and relatively smooth long term trends, making them a choice suitable for some non-directional trading strategies.

Best Brokers for Eurodollar Futures

Because the eurodollar is such a widely used financial instrument, you can trade them at nearly any reputable futures broker that offers an execution service in U.S. futures contracts. Make sure that you have good trading software to actually execute your trades.

get started securely through NinjaTrader’s website
Best For
Advanced Futures Trading
N/A
1 Minute Review

NinjaTrader is a powerful derivatives trading platform specializing in futures, forex and options. The platform has a number of unique trading tools. A free version does exist without the extra goodies provided by Trader + and OrderFlow + but users can still break down charts, backtest strategies and trade without upfront payment. NinjaTrader hosts its own brokerage services but users have their choice of several different brokerage options. Accounts have minimums depending on the securities traded and commissions vary depending on the version of the platform. Advanced derivatives traders will have endless fun with the platform’s mighty array of tools and analyzers.

The free version, which is included with all brokerage accounts is a great starting platform for new traders without the financial commitment. As you grow in your trading and are ready for more tools and functionality, you can add more complexity.

Best For
  • Futures Traders
  • Traders looking for 24/7 action
  • Advanced Traders
Pros
  • Powerful analysis tools
  • Free download and simulated trading
  • Open source trading apps to enhance experience
Cons
  • Can only trade derivatives like futures and options
get started securely through Tradovate’s website
Best For
High-volume Traders
N/A
1 Minute Review

Tradovate is an innovative futures broker offering a tiered pricing structure and a comprehensive proprietary trading platform you can access with additional fees. Tradovate offers a community tab that allows you to connect with other traders and exchange trading ideas. New users can test out Tradovate’s platform with a demo account and free trial, which allows new investors to master the learning curve before opening an account. Though the platform might be too complicated for traders who prefer a simplified experience, it can be a strong choice for more experienced users.

Best For
  • Experienced and intermediate futures investors
  • High-volume traders
  • Mobile traders
Pros
  • Free trading platform packed with unique features
  • Community tab allows users to connect with other traders
  • Tiered pricing structure
  • Easy to use out of the box for experienced futures traders
Cons
  • Currently only supports futures trading
  • Platform can be overwhelming for new traders
get started securely through Discount Trading’s website
Best For
High Volume Traders
N/A
1 Minute Review

Discount trading is a no thrills futures trading broker that offers a multitude of options available to start trading. Low commissions, no inactivity fees, and powerful platforms to start trading.

Best For
  • High volume / High frequency futures day traders
  • Futures investors looking for the lowest futures margins
  • Traders ​needing ultra-low commission rates
  • Traders looking for great customer service and fast account opening
Pros
  • Ultra-low commission rates ($0.49 or less)
  • $500 (or less) Day Trading Margin on most markets
  • No monthly inactivity fee
  • Five different ​trade ​routing solutions
  • ​O​ver 20 of the most popular platforms in the industry
  • A completely free trading platform that includes free Level 1 Streaming Futures Quotes ● Support team that answers phone calls quickly
Cons
  • Tough to find the best platform for your needs, due to the sheer number of options available
  • Geared for traders with at least some experience trading the futures markets
get started securely through Optimus Futures’s website
Best For
Trading Micro Futures
N/A
1 Minute Review

Optimus Futures is a leading discount futures broker offering highly customized trading solutions geared towards cost-conscious retail traders with an eye for technology and personal service. Customers gain access to premium tools at no additional cost such as depth-of-market surface, footprint charting, and real-time news alerts along with a fully integrated trading journal. 

Users can register a trial version of their software to take a test-drive of the platform, unlocking many of the analysis and charting features including unlimited simulated trades. Traders can also leverage Optimus Futures 3rd party app integration, allowing you to choose the futures trading platform best suited for you.

Best For
  • Low account minimums, commissions, and margins
  • Futures & micro futures traders
  • Beginner futures traders
Pros
  • Unlimited simulated trading
  • Low day trading margins
  • Highly experienced and competent technical support
  • Customizable data fees and order clearing
Cons
  • Limited to derivatives trading like futures
  • The selection of data feeds and clearing firms can be overwhelming for newer traders

How Much is a Eurodollar Futures Contract?

Eurodollar futures contracts have a notional value that you can find through a set multiple of the underlying contract IMM Index, or International Monetary Market Index. The current value of each contract can be calculated as follows: 

1 eurodollar futures contract = $2,500 x contract IMM Index (100 minus R where R = three-month London interbank offered rate (LIBOR) for spot settlement on 3rd Wednesday of the contract month)

A move of 1 basis point in a eurodollar futures contract (0.01) corresponds with $25 per contract. For instance, a change of 0.03 means a gain or loss of $75 for a trader with 1 contract based on a 3 bps move at $25 per bp.

You will likely be required to open a margin account with your broker before trading eurodollar futures. You can control a long or short position with margin. The broker provides the rest of the capital for the contract(s). You will also be required to maintain a certain amount of money in your account to keep the trade open. This is known as the maintenance margin.

Your maintenance margin may change based on your broker’s terms of service. It’s also much more commonly affected by market movements. If your position is losing money, then the maintenance margin increases, but if the position increases in value, then the margin required to hold it will typically decline. You may receive a margin call should the value of your contract fall below your broker’s margin requirements. The margin call is a communication to you requiring additional capital to keep the trade open. If you can’t meet it, the broker will generally close your trade.

Outlook on Eurodollar Futures

Eurodollar futures specialist Larry Berman expects the eurodollar yield curve to invert sometime in the middle of 2021. An inverted yield curve corresponds to a near-term credit contraction, as it represents short term borrowing rates being higher than long term rates. In an overleveraged U.S. market, a credit crunch can mean a significant recession.

The eurodollar yield curve also predicted a slower 2020 even without the coronavirus. Currently, the curve and contract prices both correspond to a market with relatively normal liquidity and credit flow. That liquidity and flow, however, is being artificially injected into world economies through central banks and via government support payouts to businesses and individuals. Should any aspect of this shaky setup change, the market could be in for substantial losses as insolvencies rise, loan payments fail and affected currencies weaken.

What Time Do Eurodollar Futures Open?

You can also trade eurodollar futures contracts on the Chicago Mercantile Exchange (CME) Globex electronic trading platform Sunday to Friday, 6 p.m. to 5 p.m. Eastern Standard Time.

Eurodollar futures contracts trade on the International Currency Exchange (ICE) from Sunday to Friday, 7:45 p.m. to 5 p.m. EST. A pre market opens at 7:30 p.m. EST from Sunday to Friday.

Strategies for Eurodollar Futures

The eurodollar futures market is a market for patient trading. Trends in the market tend to last for quite some time, and the changes in the market are not as violent as those in the securities market, for instance. Here are a few types of popular strategies that sophisticated investors use in the eurodollar futures market.

  • Scalping: You may want to try to profit from very small movements so you can move in and out quickly and close positions before retiring for the day.
  • Contract spreads: A trader will simultaneously purchase and sell futures contracts with different maturity dates. If you believe long-term interest rates will rise faster than short-term interest rates, you would buy the longer maturity future and sell the shorter-term future. The opposite applies for a flattening yield curve.

Moving with the Market

Though some experts avoid the question, the trillions of dollars that the U.S. digitally printed to float the economy will eventually change the nature of how the world does business with the dollar. You may be able to predict how the market will react using the eurodollar futures market and yield curve to your advantage.

If you love following the flow of money in the market, the eurodollar is a vital benchmark that you should understand closely. Futures contracts on the eurodollar are a great way to hedge against or speculate on U.S. dollar movements against other currencies. Eurodollar contracts are used for taking or reducing interest rate risk.