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Fixed Income Markets and Their Derivatives, 3rd Edition by Suresh Sundaresan

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Chapter 15

Eurodollar futures contracts

Chapter Summary

This chapter introduces Eurodollar cash and futures markets. The manner in which LIBOR is determined by the British Bankers Association (BBA) is explained. The settlement of Eurodollar futures to LIBOR is described, and the procedure for extracting discount factors (zero prices) from Eurodollar futures is shown by an example. We show how Eurodollar futures prices can be used to value interest rate swaps. Hedging applications using Eurodollar futures are illustrated. Options on Eurodollar futures are used to construct caps, floors, and collars on LIBOR.

15.1 Eurodollar Markets and LIBOR

Eurodollars are bank deposits denominated in U.S. dollars but not subject to U.S. banking regulations. Typically ...

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