Can someone explain Eurodollar futures. I thought that a Euro dollar future is USD deposited in a foreign bank and primarily used to gain access to LIBOR. So if I-rates go up, I would be happy and earn a higher rate. However, it says shorting Eurodollar futures would benefit when I-rates go up.
Thanks.
Bond prices (generally) go down when interest rates go up. The long position in futures on bonds goes down when interest rates go up. Eurodollar futures are essentially futures on bonds, so the long position goes down when interest rates go up. Thus, the short position goes up when interest rates go up.
Well to be more accurate the eurodollar future is the rate on said deposit. But I believe when they were designing the contract, the 100-rate convention was chosen so that it fit in better with the pricing of fixed income instruments, because i suppose they were going to be the primary users.
Thank you sir. To clarify Eurodollar futures are US dollar, deposited in a foreign bank that are based on bonds that use LIBOR as a reference/interest rate.