Topic 6 tutorial questions – STIR futures
• How far into the future does the CME Group offer Eurodollar contracts?
• 3 months
• Quarterly for a year
• Roughly 10 years
• Monthly for a year
• What is the Eurodollar contract’s futures price when three-month LIBOR yield = 1.19%?
• 101.19
• 98.89
• 98.81
• 90.19
• Eurodollar futures are:
• Cash settled
• Physically settled
• Netted and no principal exchanged
• Always rolled over
• When spreading futures contracts, the trader is
• Long different expiration months
• Short different expiration months
• Simultaneously short and long different expiration months
• If the Mar’20 Eurodollar contract is 98.48 and Mar’21 is 98.76. (see slide 4 from lecture) The Mar ‘20-Mar ‘21 calendar spread is?
• +28 bp
• – 28 bp
• +72 bp
• If your view was no more Fed easing i.e. interest rates stay the same in 2020 & 2021 how should you trade that spread (in Q7) to make money?
• Sell the spread by doing a flattening trade
• Buy the spread by doing a flattening trade
• Sell the spread by doing a steepening trade
• Buy the spread by doing a steepening trade
• A strip hedge of Eurodollars is:
• A single Eurodollar futures contract used to hedge a 30-year loan
• A succession of Eurodollar futures contracts used to hedge individual successive 90 day reset dates on a variable loan
• Is used primarily for hedging fixed rate loans
• Packs and bundles are pre-packaged strips of Eurodollar futures contracts
• True
• False
• Below is a chart of the EDH0 – EDH1 spread
Describe the recent spread movement from September compared to the previous 9 months.
The Mar20-Mar21 calendar spread has flattened from +39.5 bps in September’19 to +12.5 bps currently(Nov’19). In the previous 9 months it had steepened from around +10 bps to +39.5 bps.
This is because of the Fed easing cycle that started in August’19 (month 8 below) as evidenced by the overnight USD Libor rate (see chart below) has led to expectations of lower interest rates which impacts the further out contracts more, so they can rally more and flatten the curve.
• What has happened to 3-month ICE LIBOR over the past few months according to the chart below:
Explain what the impact on the STIR futures in the Eurodollars over the past 10 months has likely been.
Falling interest rates is bullish for Eurodollar prices as they fix on 3-month LIBOR –
See two charts below:
First one is the same as above but clearer
Second is the Mar’20 Eurodollar future for the year Jan’19 to November’19 period
Looking at the Eurodollar futures market is a way of gauging sentiment to where the prevailing 3-month Libor will be in the future.
Bonus question – ANSWER
• December 2020 Eurodollar futures contract – you have an equivalent $1mm loan for each contract that will have its interest rate set on 100-EDZ0 at the price you pay to buy the contract. So if EDZ0 = 98.69, then it is the equivalent to a 3-month loan at 1.31% .
• EDZ0 on 20/08/19 = 98.69
EDZ0 on 9/11/20 = 99.765
• (99.765-98.69)*25*100 = 107.5*2500=$268,750 profit [remember the formula is basis points * bp value of a contract* number of contracts]
Buy
EDZ0
98.69
Buy
EDZ0
98.69
Sell 100 EDZ0
99.765
Sell 100 EDZ0
99.765