What are Eurodollar Options on Futures?

A global benchmark for speculating movement in short-term US dollar interest rates, Eurodollar futures options are one of the most actively traded options on futures products.

What is the Eurodollar?

Eurodollars are US dollars which have been deposited in commercial banks outside the United States. This includes deposits made at foreign banks and overseas branches of American banks.

Since these funds are held outside the US, Eurodollars are not subject to the same banking regulations as domestic deposits and are also unregulated by the Federal Reserve Board. As these funds were once exclusively held in Europe, the naming convention “Eurodollar” has stuck even though they are also now held in banks located in the Caribbean, Asia and beyond.

Since the Eurodollar market is essentially free from regulation, these deposits have potential to pay higher interest than deposits made in the US. On the other hand, the overseas location of these funds exposes them to the potential political and economic risk present in the countries they are held.

Because of its international participation, the Eurodollar market is one of the largest capital markets in the world.

Eurodollar Futures (GE)

Eurodollar futures are regarded as a key barometer of global money flows. As a derivative financial vehicle, the price of Eurodollar futures is based on a calculation of interest rates on 3-month Eurodollar deposits for specified dates in the future. Prices are determined by the market’s forecasts of these interest rates.

Originally traded solely on the floor of the Chicago Mercantile Exchange (CME), Eurodollar futures were the first contracts to be settled in cash as opposed to physical delivery.

Today, roughly 98% of all Eurodollar futures are traded on the CME Globex electronic trading platform.

The chart above, created for FREE using the NinjaTrader platform, displays the past 3 years of trading activity for Eurodollar futures on a weekly timeframe. After a sharp 8-month decline from late 2017 to mid-2018, price has since recovered from the lows and the trend has turned bullish.

Eurodollar Futures Options (EDF)

Among the most actively traded options contracts, options on Eurodollar futures averaged over 1.1 million contracts traded per day in 2019. The deep liquidity of Eurodollar options provides traders with ample opportunities to speculate on the direction of US interest rates.

Options on Eurodollar futures allow traders to hedge against unfavorable changes in the prices of Eurodollar futures while also potentially profiting from favorable price changes. Eurodollar options on futures traders can exercise these options on or before expiration.

Similar to other options on futures products, Eurodollar options provide owners the right but not the obligation to buy or sell the underlying futures contract at a specific price on or before the option’s expiration date.

Although trading options on futures can be a way to manage risk, speculative trading of options is inherently risky and traders should always practice appropriate risk-mitigation techniques.

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