About Eurodollars (ED)

All CME interest rate futures contracts are traded using a price index, which is derived by subtracting the futures' interest rate from 100.00. For instance, an interest rate of 5.00 percent translates to an index price of 95.00 (100.00 - 5.00 = 95.00). Given this price index construction, if interest rates rise, the price of the contract falls and vice versa. Therefore, to profit from declining interest rates, you would buy the futures contract (go long); to profit from a rise in interest rates, you would sell the contract (go short). In either case, if your view turns out to be correct, you will be able to liquidate or offset your original position and realize a gain. If you are wrong, however, your trade will result in a loss.

The design of most CME interest rate futures contracts features a minimum price move, or "tick" of 0.01. Gains or losses, therefore, are calculated simply by determining the number of ticks moved, multiplied by the value of the tick. For the Eurodollar, LIBOR and 13-week T-bill futures the tick value is $25. During its expiring month only, a Eurodollar or LIBOR futures contract can trade in half-tick or 0.005 increments, equaling $12.50. Thus, a price move from 95.00 to 95.01 for example, would mean a $25 gain for the long position, and a $25 loss for the short position. For the Euroyen contract and the Mexican interest rates, the treatment is analogous, but the gains and losses are realized in Japanese yen and Mexican pesos, respectively. That is, each 0.01 price move gives a ¥2,500 or MP50 result.

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