Eurodollars are considered U.S. dollar denominated deposits in banks not in the United
States. Although the prefix “euro” is used, the contract has no relationship to European
currency. Unlike some of the other interest rate products, they are not guaranteed by any
government entity. These US Dollar deposits in banks held in commercial banks outside
the jurisdiction of the Federal Reserve can be taken as a reflection of the London
Interbank Offered Rate (LIBOR) for a three month offshore deposit.
Deposits of US dollars in foreign banks grew in the second half of the last century,
owning partly to our commercial deficits.
Eurodollar futures have been traded on the CME since the end of 1981 and the price – as
shown in the contract specifications – is a reflection of the forecasted interest rate at the
futures contract’s delivery date. For example, a forecast for a 5 percent interest rate
would be reflected in a price of 95.00 for the Eurodollar.
The interest rate in question is the LIBOR, the rate at which banks borrow from one
another on the London interbank market. It is calculated by Thomson Reuters and
published by the British Bankers’ Association every day. In interest rate trading terms,
Eurodollar contracts are short term debt instruments.
The implied forward rate calculation looks like this:
The tick size calculation for the contract comes from this equation:
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