Just as stock index futures reflect the cash-P-500 market and soybean futures reflect the spot soybean market, eurodollar futures should position themselves at levels reflecting implied prices or interest rates in the fra market. In addition, eurodollar futures prices directly reflect and reflect the yield curve. This is intuitive considering that a euro-dollar futures contract represents a three-month investment that will be concluded in N-Days in the future. If future Eurodollars did not reflect IFRs, there would certainly be a possibility of arbitration. Here is my understanding of both instruments. Please let me know if I have the right distinction. I know there are other differences. In short, with FRA, you are locked up to borrow at a certain interest rate in the future. (Long-term earnings when interest rates rise) With future Eurodollars, you will in future be blocked for loans at a specific interest rate. (Benefit for the long position when the interest rate drops). FRA – A futures contract – If you go for a long time on an FRA, you have the right to borrow at a certain interest rate in the future.
So if the interest rate goes up in the future, you`ve blocked your borrowing at a lower interest rate and you`ll win when interest rates go up. The profit is billed in cash and you will receive money if the interest rate increases. The money will of course be paid in the future. Futures eurodollars – a futures contract – If you have a long Eurodollar contract, you have locked yourself in to get a certain interest rate. (This is exactly the opposite of FRA – With FRA, you will in the future be stuck at a certain rate of borrowing). You earn money on futures on eurodollars if interest rates go down because you have locked yourself in to get certain interest. (This is exactly the opposite of FRA, where you earn money when the interest rate goes up). An FRA is a contract in relation to the means of payment between two parties, in which the payment is linked to the future level of a fixed interest rate, for example. B three-month ICE LIBOR. Both parties agree on an interest rate payable for a hypothetical deposit to be incurred at a later date. The purchaser of an FRA agrees to pay interest on this hypothetical loan at a predetermined fixed interest rate and, in return, to obtain interest at the actual rate that prevails at the time of settlement.
Let`s look at the next structure of interest rates on eurodollar futures and treasury markets. Suppose it`s December. This is the best investment for the next six months: in addition to the daily mark-to-market, counterparty risk is also eliminated by the clearing house of futures contracts. Eurodollar futures prices reflect ifrs in the fra market, as market participants can follow arbitrage options if prices are misdirected. An arbitrage transaction could therefore be envisaged by investing in the third option at 0.83% and by financing this investment with a direct loan of 0.80%.