Eurodollar Trading Strategy (Backtest And Futures Example)
Last Updated on May 27, 2023
Launched by the Chicago Mercantile Exchange (CME) in 1981, the Eurodollar futures was the first cash-settled futures contract and has been one of the most liquid futures contracts in the world. It has a staggering underlying market and a large user base that consists of traders, asset liability managers, interest rate hedgers, and spread traders. Want to know about the Eurodollar futures strategy?
The Eurodollar futures strategy is the methodology or technique you can use to profitably trade the Eurodollar futures market. Eurodollar futures refer to a futures contract whose underlying asset is a Eurodollar time deposit that has a principal value of $1 million with a three-month maturity. The contract trades on the CME Globex platform and is financially settled. Eurodollar trading strategies often include technical and fundamental analyses for market timing and risk management.
In this post, we answer some questions about the Eurodollar futures strategy. We also make a backtest of such a strategy.
What is the Eurodollar futures?
Eurodollars are time deposits — interest-yielding bank deposits with specified dates of maturity — denominated in U.S. dollars and held in foreign banks. Given that those time deposits are held outside the U.S. borders, Eurodollars are not under the jurisdiction of the Federal Reserve and, as such, are subject to a lower level of regulation.
The Eurodollar futures is a futures contract whose underlying asset is a Eurodollar time deposit that has a principal value of $1 million with a three-month maturity. But on expiration, the seller of the futures contract can settle by cash rather than making a delivery of the underlying asset. The contract trades on the CME Globex platform. It has been one of the most liquid futures contracts in the world.
The Eurodollar futures contract owes its success to a very large user base and an underlying market (3-month ICE LIBOR money market and forward rate agreement markets) that is staggering in size. The contract attracts speculative and spread traders, as well as asset managers and interest rate hedgers.
What is a Eurodollar futures strategy?
The Eurodollar futures strategy is the methodology or technique you can use to profitably trade the Eurodollar futures market. It often includes technical and fundamental analyses for market timing and risk management.
Users consist of traders who want to speculate on interest rate fluctuations, asset liability managers who want to manage risks, interest rate hedgers who want to secure favorable interest rates, and spread traders who trade the difference across different contract months.
If you want to trade futures successfully, you must have a solid trading strategy, and your Eurodollar futures strategy must include precise entry and exit signals, as well as risk management techniques.
Eurodollar futures strategy backtest
A backtest with strict trading rules, settings, statistics, and historical performance is coming soon.
What is the seasonality of Eurodollar futures?
In the financial markets, seasonality refers to the tendency of an asset’s price to move in a fairly predictable way during certain periods of the year. The periods may refer to the months or seasons (winter, spring, summer, and fall) of the year.
The Eurodollar futures have been noted to perform better during the months of spring, summer, and fall seasons than during the winter months. See the chart below:
What moves the Eurodollar — What affects the Eurodollar the most?
The main factor in the Eurodollar market is the 3-month LIBOR interest rates. The three-month LIBOR is a benchmark for short-term interest rates at which banks can borrow funds in the London interbank market. The Eurodollar market reflects investors’ gauge of the three-month U.S. dollar LIBOR interest rate expected on the settlement date of the contract. A reduction in the LIBOR rate means an increase in Eurodollar futures prices and vice versa.
Another factor is geopolitics. Government policies, such as trade wars and tariffs, can affect international trades and cause problems in the import and export markets which actively use Eurodollars. Depending on the situation, Eurodollar futures can be affected.
How are Eurodollar futures traded?
The Eurodollar futures contracts are traded on the CME Group’s Globex electronic platform, which can be accessed from anywhere in the world. The contract trades from Sundays to Fridays from 6:00 p.m. U.S. ET to 5:00 p.m. U.S. ET the next day, with a one-hour break at the end of each day. It also trades on ICE Futures Europe.
The contracts come in quarterly cycles of Mar, Jun, Sep, and Dec, with contracts listed for 40 consecutive quarters — a new quarterly contract for trading is listed on the last trading day of the nearby expiry. A contract unit is equivalent to $2,500 x contract-grade IMM Index. The contract is financially settled, and trading terminates at 11:00 a.m. London time on the 2nd London business day before the 3rd Wednesday of the contract month.
How do you start trading Eurodollar futures?
To trade the Eurodollar futures contract, you need a futures broker that would grant you access to the CME Group’s exchange where contracts are traded and also help to clear your trades. Start by registering with a futures broker and then funding your account.
Alternatively, if you just want to speculate on price movements, you may trade the CFD of futures contracts via an online CFD broker, such as IG. A CFD contract is a contract that exchanges the price difference between the opening and closing of a trade. It can be traded indefinitely without worrying about contract expiry.
What is the Eurodollar trading at?
The Eurodollar futures were trading at $95.1300 as of December 1, 2022. See the chart here on the CME platform chart. The chart was retrieved from TradingView.
As the price changes from time to time, what is quoted here may not be the price it would be trading when you are reading this post. To get the real-time price on the CME platform or directly from TradingView, click either of those links.
What’s the Eurodollar futures hour?
The Eurodollar futures trade on the CME Globex electronic platform from Sunday to Friday, from 6:00 p.m. U.S. ET – 5:00 p.m. U.S. ET (5:00 p.m. – 4:00 p.m. CT). There is a one-hour break before the start of the next trading day: Monday to Thursday, from 5:00 p.m. U.S. ET – 6:00 p.m. U.S. ET (4:00 p.m. – 5:00 p.m. CT) for daily maintenance.
Where can I find trading charts?
Charts can be found on any trading platform that offers chart services. If your platform does offer charts, you can subscribe to trading charts via a third-party platform, such as MultiCharts.
You can also use TradingView, which offers free access to charts of different instruments. However, to connect to your broker, you have to subscribe to the Pro services. You can also access the TradingView chart via the CME platform.
What are the trading symbols for Eurodollar futures?
The trading symbol for the Eurodollar futures contract on the CME platform is GE. The product codes for the different services are as follows:
- CME Globex: GE
- CME ClearPort: ED
- Clearing: ED
On ICE Futures Europe, the trading symbol is ED.
What is the specification for the Eurodollar futures contract?
The underlying asset is a Eurodollar Time Deposit having a principal value of USD 1,000,000 with a three-month maturity. One contract unit of the Eurodollar futures is equivalent to $2,500 x contract-grade IMM Index, where contract-grade IMM Index = 100 minus R. The price quotation is in IMM Three-Month LIBOR index points or 100 minus the rate on an annual basis over a 360-day year. For example, a rate of 2.5% shall be quoted as 97.50. (1 basis point = .01 = $25)
There are quarterly contracts (Mar, Jun, Sep, Dec) listed for 40 consecutive quarters, and a new quarterly contract is listed for trading on the last trading day of the nearby expiry. The contract is financially settled, and trading terminates at 11:00 a.m. London time on the 2nd London business day before the 3rd Wednesday of the contract month.
Why should you start trading Eurodollar futures?
There are many reasons you may want to trade this contract, and these are some of them:
- To speculate on the fluctuations of the interest rates and make some profits when you are right.
- To hedge your fixed-income obligations from future changes in interest rates, especially if you are involved in international transactions and financing.
- To diversify your investment portfolio and spread out your risks across more asset classes
- To profit from arbitrage trading.
What is the contract size?
The underlying asset is a Eurodollar Time Deposit having a principal value of USD 1,000,000 with a three-month maturity. One contract unit of the Eurodollar futures is equivalent to $2,500 x contract-grade IMM Index, where contract-grade IMM Index = 100 minus R. So, with the contract trading at $95.13, as of writing, one contract would be worth $2500 x 95.13 = $237,825.
What is the tick size?
For the nearest expiring contract, the tick size is $6.25 per contract. For all other contracts, the tick size is $12.50. The new front-month contract begins trading at a $6.25 tick size on the Last Trading Day of the expiring contract.
What is the minimum price fluctuation for Eurodollar futures?
For the nearest expiring contract, the minimum price fluctuation is one-quarter of one basis point or 0.0025 points per contract (equivalent to $6.25 per contract tick size).
For all other contracts, the minimum price fluctuation is one-half of one basis point or 0.005 points per contract (equivalent to $12.50 per contract).
The new front-month contract begins trading at 0.0025 price points on the Last Trading Day of the expiring contract.
Are there any ETFs?
The only active ETF that tracks the Eurodollar market is the PIMCO SELECT Eurodollar High Quality Fund Institutional USD. It is priced in GBP and is available for sale in Germany, Ireland, and Spain.
What factors affect Eurodollar prices?
One important factor is the 3-month LIBOR interest rate, which is a benchmark for short-term interest rates at which banks can borrow funds in the London interbank market. An increase in the LIBOR rate would lead to a decrease in Eurodollar futures prices and vice versa.
Another factor is geopolitics. International trades such as import and export which actively use Eurodollars can be affected by government policies and tariffs. Depending on the situation, Eurodollar futures can be affected.
What is the all-time high for Eurodollar futures?
According to TradingView’s chart for the Eurodollar futures, the all-time high for the Eurodollar futures contract is $99.8850, which it achieved in June 2021 and retested in September 2021.
What are the biggest risks in trading Eurodollar futures?
The biggest risk when trading any futures contract comes from adverse price movement. Since futures are leveraged instruments, the losses are calculated using the actual value of the contract size traded, rather than the margin deposited. So, if you trade with a 20x leverage, a 1% negative movement results in a 20% loss in your account, while a 5% adverse price move would wipe out your entire account.
What is the settlement method?
What is the settlement procedure?
Expiring contracts are financially settled to 100 minus the ICE Benchmark Administration survey of the 3-month U.S. Dollar LIBOR on the last trading day. The final settlement will be rounded to four decimal places, equal to 1/100 of one basis point, or $0.25 per contract.
What is the block minimum for Eurodollar futures?
A block trade minimum is not available for this contract.
What is the difference between Eurodollar futures and the CFD instrument for Eurodollar?
The Eurodollar instrument is offered by some Forex and CFD brokers as a CFD contract that tracks the Eurodollar futures market. CFD trading differs from futures in that futures contracts have fixed expiration dates, while CFDs can be traded indefinitely.
Which forex instrument is the same as Eurodollar futures
Trading the Eurodollar CFD that tracks the Eurodollar futures would be similar to trading the Eurodollar futures contract except that the CFD can be traded indefinitely without worrying about contract expiry. However, not many CFD brokers offer Eurodollar CFD, and even when you see one, you should make sure it is regulated by the financial regulator in your country of residence.
What are some important dates for this market?
Some of the important dates in the Eurodollar market are as follows:
- 1981: the Eurodollar futures were launched on the CME exchange
- February 1982: The contract made its all-time low of 82.84
- June 2021: The market made its present all-time high of 99.885
What is the highest Eurodollar has ever been — its all-time high?
According to TradingView’s chart for the Eurodollar futures, the highest the Eurodollar futures contract has ever reached was $99.8850, which happened in June and September 2021.
What is the lowest Eurodollar has ever been — its all-time low?
According to TradingView’s chart for the Eurodollar futures, the highest the Eurodollar futures contract has ever reached was $82.840, which happened in February 1982.
Trading the Eurodollar futures offers opportunities for speculation, spread trading, portfolio diversification, and hedging interest rate risks in international trades. However, it is important to use a Eurodollar futures strategy that has been proven to work.