Eurodollar and LIBOR Overview
The Eurodollar futures contract is one of the largest and most successful interest rate-based contracts.
Eurodollars should not be confused with the currency of the European Union which is known as the euro. A Eurodollar and a euro are not the same thing.
Eurodollar is a term that refers to any United States dollar (“U.S. dollar”) held outside the U.S. banking system. In other words, there can be Eurodollars in the UK, the UAE, Brazil, Burundi, etc. They can even exist in the United States if held in a branch of a foreign bank. The term is not determined by geographical location.
After World War II when recovering economies gradually began to accumulate onto U.S. dollars, some countries preferred not to repatriate U.S. dollars through U.S. banks, but instead held them “off-shore”, primarily in London-based banks out of the reach of the United States government.
Over time, a bank lending market grew up around this pool of funds.
British bankers began referring to the lending rates in this market as the London Inter-Bank Offer Rate, also known as LIBOR.
LIBOR has grown into a set of rates across the length of the yield curve from overnight to twelve months.
Eurodollar futures at CME Group are based on the three month LIBOR underlying rate and listed under the March quarterly cycle for 40 consecutive quarters, plus four serial contracts at the front end of the curve.
Eurodollars are financially settled products, and expire on the second business day that precedes the third Wednesday of each contract month, which is usually a Monday.
Eurodollar futures contracts are used by a wide array of users, from banks to proprietary trading firms and commercial businesses to hedge funds.
So, if you have U.S. dollar market exposure, Eurodollar futures can help manage your risk.