Eurodollar Totally Explained

Everything about Eurodollar totally explained

Eurodollars are deposits denominated in United States dollars at banks outside the United States, and thus are not under the jurisdiction of the Federal Reserve. Consequently, such deposits are subject to much less regulation than similar deposits within the United States, allowing for higher margins. There is nothing "European" about Eurodollar deposits; a US dollar-denominated deposit in Tokyo or Caracas would likewise be deemed Eurodollar deposits. Neither is there any connection with the euro currency. More generally, the "euro" prefix can be used to indicate any currency held in a country where it isn't the official currency: for example, euroyen or even euroeuro.

History

Gradually, after the Second World War, the amount of U.S. dollars outside the United States increased enormously, both as a result of the Marshall Plan and as a result of imports into the U.S., which had become the largest consumer market after World War II.
   As a result, enormous sums of U.S. dollars were in custody of foreign banks outside the United States. Some foreign countries, including the Soviet Union, also had deposits in U.S. dollars in American banks, granted by certificates.
   During the Cold War period, especially after the invasion of Hungary in 1956, the Soviet Union feared that its deposits in North American banks would be frozen as a retaliation. It decided to move some of its holdings to the Moscow Narodny Bank, a Soviet-owned bank with a British charter. The British bank would then deposit that money in the US banks. There would be no chance of confiscating that money, because it belonged to the British bank and not directly to the Soviets. On February 28 1957, the sum of $800,000 was transferred, creating the first eurodollars. Initially dubbed "Eurbank dollars" after the bank's telex address, they eventually became known as "eurodollars" as such deposits were at first held mostly by European banks and financial institutions. This means that on January 1, 2008, the exchange will list 40 quarterly expirations (March, June, September, December for 2008 through 2017), the exchange will also list another four serial (monthly) expirations (January, February, April, May 2008). This extends tradable contracts over ten years, which provides an excellent picture of the shape of the yield curve. The front month contracts are among the most liquid futures contracts in the world, with liquidity decreasing for the further out contracts. Total open interest for all contracts is typically over 10 million.
   The CME Eurodollar futures contract is used to hedge interest rate swaps. There is an arbitrage relationship between the interest rate swap market, the Forward Rate Agreement market and the Eurodollar contract. CME Eurodollar futures can be traded by implementing a spread strategy among multiple contracts to take advantage of movements in the forward curve for future pricing of interest rates.
   Eurodollar contracts are extremely popular due to their ability to accurately hedge the mortgage market debt. The correlation with mortgage market debt is extremely high, higher than the CBOTs Treasury Futures contracts.
   In the past, the minimum price fluctuation of a Eurodollar futures price was 0.01 (for example, a price change from 96.44 to 96.45). A price change of 0.01 is referred to as a "tick" and represents a change in yield of a basis point. The exchange has reduced over time the minimum price fluctuation of the contract because of increasing liquidity. As of December 2007, these are 0.0025 (a quarter tick) for the nearest expiring month and 0.005 (a half tick) for all other months. This notation is confusing because strictly one tick is defined as the minimum price fluctuation of a futures contract.
   A tick in CME Eurodollar futures is worth $25.00, based on the $1,000,000 notional value of this contract, as calculated below:
$1,000,000 notional value x .0001 (one basis point) x 90/360 (three month) deposit period = $25.00.

Eurodollar sweeps

In United States Banking, eurodollars are a popular option for what are known as "sweeps". By law, banks aren't allowed to pay interest on corporate checking accounts. To accommodate larger businesses, banks may automatically transfer, or sweep, funds from a corporation's checking account into an overnight investment option to effectively earn interest on those funds. Banks usually allow these funds to be swept either into money market mutual funds, or alternately they may be used for bank funding by transferring to an offshore branch of a bank

Further Information

Get more info on 'Eurodollar'.

External Link Exchanges

Do you know how hard it is to get a link from a large encyclopaedia? Well we're different and will prove it. To get a link from us just add the following HTML to your site on a relevant page:

<a href="http://eurodollar.totallyexplained.com">Eurodollar Totally Explained</a>

Then simply click through this link from your web page. Our crawlers will verify your link, extract the title of your web page and instantly add a link back to it. If you like you can remove the words Totally Explained and embed the link in article text.
As long as your link remains in place, we'll keep our link to you right here. Please play fair - our crawlers are watching. Your site must be closely related to this one's topic. Any kind of spamming, dubious practises or removing the link will result in your link from us being dropped and, potentially, your whole site being banned.