INTEREST RATES
Finding Opportunities in a
New Interest Rate Environment
The Interest Rate market is experiencing significant volatility in 2015, as market participants are anticipating when the
FOMC will raise the Fed Funds target rate. CME Eurodollar Futures and Options, our short term interest rate products,
are the preferred tool for professional traders who want to express a view on future interest rate moves.
The word “patient” was removed from the FOMC meeting statement on March 18, introducing uncertainty into the timing of
the first rate hike.
FUNDAMENTALS OF CME EURODOLLARS
•The underlying instrument of the Eurodollar Future is a
90-day Eurodollar Time Deposit, based on $1 million
face value
SNAPSHOT OF OPEN INTEREST
(As of January 9, 2015 and 2014 ADV by Year)
Year
Color
Open Interest
2014 ADV
1
White
4,257,846
612,486
2
Red
3,210,840
967,668
3
Green
1,887,397
695,774
• For example if the yield is 0.85%, the Eurodollar
Future is quoted at 99.15 (=100.00 – 0.85)
4
Blue
916,972
259,297
5
Gold
352,705
85,293
• The Basis Point Value of Eurodollar is calculated as
the Face Value x (days/360) x 0.01%
6
Purple
63,722
9,223
7
Orange
29,862
1,743
8
Pink
7,606
186
9
Silver
3,446
73
10
Copper
932
27
78,617
4,883
•Eurodollar futures are a cash-settled futures contract
based on the 3-month LIBOR rate at expiration
–Quoted as 100-Yield:
–$1M x (90/360) x 0.01%= $25
•1 tick is equal to a full basis point, which equals $25
(1 tick = .01 = $25). However, the minimum fluctuation for
Eurodollar futures is one-half of one basis point (0.005=
$12.50 per contract) for all contracts. It is worth noting
that this tick increment is one-quarter of one basis point
(0.0025= $6.25 per contract) when the front quarterly
contract nears expiration.
How the world advances
Serials
* Note: While there are non-quarterly months available, these are much
less liquid than quarterly contracts
FUTURE CONTRACTS DELIVERY MONTH CODES
Contracts mature during the months of March, June, September, and December – extending out 10 years in the future for a
total of 40 quarterly contracts.1 There is deep liquidity extending out more than five years.
•In futures contracts, the delivery month is reflected in the symbol name with a letter code, followed by the year. The
Eurodollar symbol on Globex is GE (i.e. Eurodollar December 2015 futures=GE15). The letters for each month are
listed below.
Month Code
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
F
G
H
J
K
M
N
Q
U
V
X
Z
EURODOLLAR FUTURES EXAMPLE
(December 9, 2014 Snapshot)
As highlighted in the table below, March 2016 futures had a high of 98.795 and a low of 98.795, noting that each basis point
move is worth $25. If you would have bought the March 2016 future low at 98.795 and sold it at the high of 98.880, you would
have made 8.5 basis points or $212.50.
Month
Last
Implied
Yield
Change
Prior Settle
Open
High
Volume
DEC 2014
99.7600
0.24%
- 0.0025
99.7625
99.7625
99.7625
99.7600
112,247
JAN 2015
99.745
0.255%
- 0.01
99.755
99.755
99.755
99.745
2,011
FEB 2015
99.735
0.265%
- 0.01
99.745
99.745
99.745
99.735
429
MAR 2015
99.715
0.285%
- 0.005
99.72
99.720
99.735
99.710
754,779
APR 2015
99.675
0.325%
- 0.005
99.68
99.675
99.690 b
99.675
9
MAY 2015
99.615
0.385%
0.00
99.615
—
99.625 b
99.615 a
0
JUN 2015
99.550
0.45%
0.00
99.55
99.560
99.585
99.545
473,266
SEP 2015
99.335
0.665%
+0.005
99.33
99.335
99.375
99.325
468,758
DEC 2015
99.080
0.92%
+0.015
99.065
99.075
99.125
99.060
566,671
MAR 2016
98.825
1.175%
+0.02
98.805
98.810
98.880
98.795
495,700
JUN 2016
98.575
1.425%
+0.025
98.55
98.560
98.625
98.535
310,968
SEP 2016
98.330
1.67%
+0.03
98.30
98.305
98.380
98.285
289,348
DEC 2016
98.110
1.89%
+0.035
98.075
98.075
98.155
98.060
350,998
Note: Eurodollar contracts are quarterly, but there are also four serial contracts listed at any given time
1
Low
There are also four nearest non-quarterly or serial expirations
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Finding Opportunities In A New Interest Environment | April 2015
MIRROR OF THE MARKET FORWARD RATES
Pricing
patterns in the Eurodollar futures market are very much a reflection or mirror of conditions prevailing in the money
markets and moving outwards on the yield curve. The yield curve is a graph showing interest rate yields across different contract
lengths (2 year, 5 year, 7 year, etc.) for a similar underlying debt contract.
Eurodollar futures intra-market or calendar spreads reflect the shape of the yield curve, which is simply the yield of each bond
along the maturity spectrum.
•A flattening yield curve means the gap between the yields on short-term bonds and long-term bonds decreases, making the
curve appear less steep, whereas a steeping yield curve indicates the gap between the short-term and long-term bonds increases
In order to hedge yourself against change in interest rates, as a general rule:
•Sell ED Futures > Hedge risk of rising rates
•Buy ED Futures > Hedge risk of declining rates
TREASURY YIELD CURVE
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2 Yr
5 Yr
3/24/13
7 Yr
10 Yr
3/24/14
30 Yr
3/24/15
Yield curve expected to steepen
➞
“Buy the curve,”
i.e., buy nearby and sell deferred futures
Yield curve expected to flatten or invert
➞
“Sell the curve,”
i.e., sell nearby and buy deferred futures
Finding Opportunities In A New Interest Environment | April 2015
3
CALENDAR SPREAD TRADING
A Calendar Spread is a spread trade involving the simultaneous purchase of futures or options expiring on a particular date,
and the sale of the same instrument expiring at another date. CME Group offers listed calendar spreads on CME Globex
with implied price functionality that expands trading opportunities, increases market liquidity and improves prices. This
functionality allows resting bids and offers for outright Eurodollar futures to be automatically combined to create synthetic
spread orders. The quoted values of the calendar spread traded as a spread can be tighter though than the outright market.
By trading the Eurodollar calendar spread, you are trading
the expectations for changes in the relationship between
contracts in the same market with different expirations.
•Buying a Calendar Spread – Buying a near-term contract
month and selling a deferred month in Eurodollar futures
(i.e. Buying the September 15/December 15 spread
means you are buying September 2015 ED Futures and
Selling December 2015 ED Futures)
•Selling a Calendar Spread – Selling a near-term contract
month and buying a deferred contract month (i.e. Selling
September 2015 and buying December 2015 futures)
Price of a Calendar Spread: Quoted as the price of
the near-term or nearby contract less the price of the
deferred contract.
For example, the September 2015 – December 2015
Eurodollar Calendar Spread is trading at a difference of
24 basis points.
Bid
Quantity
Bid
Price
Ask
Price
Ask
Quantity
Sep 15-Dec 15
Calendar Spread
45259
24.0
24.5
105661
ED Future Sep 15
921
9937.5
9938.0
3905
ED Future Dec 15
6185
9913.0
9913.5
27
Contract
*Snapshot on March 6, 2015 at 1:50 pm
If you think that spread is going to widen, you could buy the
calendar spread. This can be accomplished by buying the
outright contracts, paying 99.38 on the September 2015
contract and selling 99.13 in the December 2015 contracts.
This would result in a price of 25 bps (99.38-99.13=0.25).
Or you can trade this as a listed calendar spread where
you can buy the offer at 24.5 basis points, saving you
0.5 basis points. Tremendous liquidity can be found in all
of the resulting in the tightest bid-ask spreads.
OPTIONS ON EURODOLLAR FUTURES
Options on Eurodollar futures are among the most
actively traded exchange-listed interest rate options
contracts in the world.
CME Group offers sixteen quarterly Eurodollar options
corresponding to the quarterly Eurodollar futures with the
underlying contract the corresponding quarterly Eurodollar
futures. Eurodollar options are American Style, meaning
they can be exercised at any time. If not exercised, the
options will expire at 7:00 pm CT on the last trading day.
•The strike prices for Eurodollar options are listed in
intervals of 12.5 basis points (0.125) in a range of 150
basis points above and below the strike that is closest to
the previous day’s underlying futures settle price.
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Finding Opportunities In A New Interest Environment | April 2015
•The Options are quoted in IMM index points. The tick size
or minimum fluctuation is one-half of one basis point
(0.005= $12.50 per contract) for all contracts. It is worth
noting that this tick increment is one-quarter of one basis
point (0.0025= $6.25 per contract) when the nearer
contracts get closer to expiration.
Eurodollar options provide the ability to limit losses while
maintaining the possibility of profiting from favorable
changes in the futures prices – as they allow traders and
hedgers an opportunity to take advantage of their views on
the direction of the U.S. Interest rates.
OPTION LIQUIDITY
One of the best ways to determine a contract’s liquidity is by reviewing its Open Interest, the total number of contracts that
are currently open (meaning the contracts have been traded but not yet liquidated by an offsetting trade, or for options,
exercised or assigned). The higher the open interest, the greater the liquidity, which will make it easier to trade a particular
option contract or strike within a contract. Across all of the Eurodollar options products, open interest is over 30 million
contracts with a sufficient amount of open interest in the front quarterly contracts.
EURODOLLAR OPTIONS OPEN INTEREST
(As of March 15, 2015)
Contracts
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
The chart below focuses on the June 2015 contract, which has numerous strikes with Open Interest in the 100,000s. In the
Summary Table, Total Open Interest in the Calls and Puts is 1 million and 2.6 million, respectively.
EDM5 – OPEN INTEREST
Call Summary vs. 99.660
Total
ITM
OTM
OI
Change
OI
Change
OI
Change
1,114,084
-194,756
578,800
-92,910
535,284
-101,846
Put Summary vs. 99.660
Total
ITM
OTM
OI
Change
OI
Change
OI
Change
2,625,045
-46,080
3,500
200
2,621,545
-46,280
Finding Opportunities In A New Interest Environment | April 2015
5
OPTION STRATEGIES
TRADING EXAMPLE: Belief that Short Term Interest Rates (STIRS) will be higher before the contract’s expiration.
Purchase a Put: capturing a potential move lower in the futures
Higher Interest Rate ➞ Lower Futures Prices . . . . . . . . . . . Lower Interest Rate ➞ Higher Futures Prices
EDM5 Prices: The below pricing sheet highlights that the June futures contract is trading at 99.55 with an implied rate of
0.45% (100-99.55). The at-the-money (ATM) strike price is therefore 99.50. If you expect the STIR to be higher (futures
lower), then purchase a PUT. Your strike price choice is dependent on your view of STIR + premium willing to pay.
In this example, you choose the ATM Put (99.50 Strike). The intrinsic value (difference between the strike price (X) and the
future (F)) of this Put is dependent on which way the futures move.
•If futures decline below the strike price of 99.50, then the Put will be in-the-money (ITM)
–If the futures price remains below the strike at expiration, then you will make money if the intrinsic value is greater than
the premium you paid
Put has a theoretical value of 6.70. You paid 6.5 ➞ The premium you paid is .2, under the theoretical value
–You will make a profit if the futures price moves BELOW 99.435 or more than 6.5 under the strike price of 99.50
EDM5 PRICES
BREAKEVEN CHART FOR ATM PUT
(99.50 strike)
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Finding Opportunities In A New Interest Environment | April 2015
DDITIONAL OPTION STRATEGIES: If the premium on the previous example is too high, you can offset part of that cost by
A
selling one or two puts of lower strike prices against your original trade.
Put Spread: Selling one put (of lower strike price) against previous Put
•Limits the potential gain to the difference between the two strikes (less the premium paid), but with the benefit of lowering
your cash outlay
Put 1x2: Selling two puts (same strike for the pair) against the ATM Put (strike 99.50)
•Decreases the premium paid even further compared to the Put Spread (may even create a net credit), but now there is
some downside risk
–Note: How much risk depends on your view as well as how far away the strike you are selling is away from your purchase
•Benefit of a 1x2: If the market moves in your favor, especially over a period of time, you can purchase one of your short legs
back ➞ then it simply becomes a Put Spread position
PUT SPREAD
PUT 1X2
Finding Opportunities In A New Interest Environment | April 2015
7
For more information about Implied Pricing Functionality visit:
cmegroup.com/confluence/display/EPICSANDBOX/Implied+Orders
For market data, contracts and other information about
CME Eurodollar Futures and Options visit:
Futures: cmegroup.com/eurodollarfuturesquotes
Options: cmegroup.com/eurodollaroptionsquotes
For questions, contact: [email protected]
Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the
amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade
because they cannot expect to profit on every trade. All examples in this brochure are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual
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Board of Trade is a trademark of the Board of Trade of the City of Chicago, Inc. NYMEX is a trademark of the New York Mercantile Exchange, Inc. The information within this brochure has been compiled by CME Group for
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are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are made
subject to and are superseded by official CME, NYMEX and CBOT rules. Current CME/CBOT/NYMEX rules should be consulted in all cases before taking any action.
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